re: Cancelled homeowner’s policy refund question

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So it won’t just be adding to the whole mortgage all at just 3%.

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No. They gave you a loan for the house, not for the insurance. Everything that comes out of your escrow is supposed to be pre-paid. Property tax, homeowners insurance, flood insurance (if required)...all pre-paid. So they will try to recoup an escrow shortage in a shorter period of time.

You pay the first year as part of your closing costs. Then going forward, a portion of your regular monthly payment is for escrow and set aside to pay insurance and property taxes. If insurance and/or taxes go up year over year, your escrow will be short. Mortgage company still pays it but they adjust your note going forward. They don't add the shortage to the backend of the loan. You're just going to have a much bigger escrow shortage if you don't send that refund money back to the mortgage company.