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What Is Escrow to Mortgagor Disbursement?

Last updated 03/08/2024 by

Benjamin Locke

Edited by

Fact checked by

Summary:
The term “escrow to mortgagor disbursement” refers to the process of a lender paying money toward a borrower’s expenses through an escrow account. Many lenders have a third-party agreement with an independent escrow agency as well as the borrower to maintain this account and disburse fees from it. Escrow is an essential tool in real estate transactions that eliminates potential conflicts of interest while using the security of an escrow agency that is bound by law to protect your money.
When you buy a house with a mortgage, you will have to pay more than just your loan. From sea to shining sea, every state in the union levies property tax, and if you don’t pay it, you risk the county or municipality filing a lien against you. Your lender will also require you to have homeowners insurance on the property, and you may also need to pay homeowners’ association (HOA) fees, depending on where you live.
To facilitate all of these bills getting paid on time, your lender will use an escrow account to collect the money and disburse it. This process (in which you are the mortgagor) is known as “escrow to mortgagor disbursement.” In short, it describes the act of a lender withdrawing money from an escrow account to pay fees on behalf of a borrower.

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Escrow accounts 101

When you go to the local Shell station and buy a candy bar, you typically don’t have another person hold the money on your behalf until you receive the candy bar. You just give the money to the cashier, receive the candy bar, and go on your way.
This is not the case with many financial, legal, and real estate transactions. Not only is there much more money involved, but these are some of the most regulated industries in the country. When facilitating such a large financial transaction, a third-party independent escrow agent will often act as a middleman between all the parties involved in a transaction.

Pro Tip

Your escrow agent will not always be a title company, depending on where you live. In New York City, for example, it’s common for a real estate attorney to act as the escrow agent for a buyer. In the United Kingdom, the solicitors for both the buyers and sellers will commonly act as the escrow agent.

Escrow accounts in real estate

In most cases, a title company will offer an independent escrow account service. A title company is a third-party company that handles different parts of a real estate transaction, including escrow services and title searches. However, there are also situations where an independent escrow agency is used rather than a title company. Here is what an escrow company usually handles in a real estate transaction.

Earnest money deposit

An earnest money deposit is a deposit that a buyer makes to prove their intent to purchase this property. It can also sometimes be called a “reservation fee.” The buyer intends to purchase this property, and to ensure their access to it, they put down some money.

Down payment and closing costs

The down payment is the money that the borrower puts into the property as equity, with the assumption that the rest will be financed by the lender. For instance, if you get a 70/30 loan-to-value ratio, the 30% you put down goes directly to the title company or escrow agent. After the full transaction is complete, then the loan money is released to the seller along with your funds.

Mortgage funds

The money borrowed from the lender in the form of a mortgage goes to an independent escrow agent or title company as well. Just as the 30% on a 70/30 LTV is wired to the escrow agent by the buyer, the 70% loan is wired to the escrow agent by the lender. These monies are all released to the seller once the transaction completes.

Fees/insurance via mortgagor disbursement

Many lenders will include money for property tax, HOA fees, and insurance premiums as part of a borrower’s monthly payments. This money goes into an escrow account, and the lender then uses the money to pay the various entities when payments are due. Thus, a mortgage disbursement refers to money withdrawn from an escrow account that the lender pays on behalf of the borrower.
A lender usually provides an annual escrow account analysis that shows how much money you will need in escrow funds to pay the fees, taxes, and insurance associated with the property.

Pro Tip

As your property value can change each year, your property tax can change along with it. This will affect the amount you need to put in your escrow account, and thus your monthly payments. Make sure you pay attention to this, especially if you live in an area where property values can skyrocket.

Escrow and escrow balance refund

What is an escrow refund? As the money is held by a third party and not the person who needs to be paid, you can just take it out as you like, right? No, if the account has excess funds, there are only specific circumstances in which you can receive a refund from the escrow account that provides the mortgagor disbursement. Some of these are as follows:

Mortgage paid in full

If your mortgage has been paid in full, the lender is not on the hook anymore to make sure you pay your insurance and property taxes. Therefore, they will close the account and refund you any money that’s left.

Change in fees

If your homeowner’s insurance bill, or any other insurance you have, becomes lower, then you can request to have the money refunded from escrow. Many times, HOA fees and insurance are paid in chunks in advance.

Taxes change

Although property taxes tend to go up, not down, a drop in property taxes could allow you to request a refund. On the flip side, however, if property taxes go up, you’ll be required to put more into your escrow account.
According to real estate, mortgage, and loans expert Tanya L. Blanchard, founder of Madison Chase Capital Advisors,
The lender escrows your property taxes (city and county), hazard insurance (homeowner’s insurance), and flood insurance (if applicable). The homeowner should read their annual escrow statement carefully to ensure they do not have an escrow shortage if their property taxes or hazard insurance increases. Most lenders do not charge you a fee to manage your escrow or disburse funds for your property taxes and insurance.”

You sell the property

If you sell the property, there is no need to have an escrow account for mortgage disbursement as it relates to this property. If you buy a new property with a mortgage, however, you will need to go through the same escrow process as you did with the original property.

Refinance escrow refund

Say you refinanced the property, and there has been a change in both your terms as well as extra equity that has been turned into cash. In this case, you can have a significant sum in your escrow account that you can request to be sent/refunded to you.
Are you thinking about refinancing your mortgage? If you’d like to find a better lender with better terms, try searching the options below.

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Can you trust an escrow account?

By law, an escrow agent has fiduciary duties and obligations to act in good faith with all parties involved in the escrow agreement. The Real Estate Settlement Procedures Act (RESPA) of 1974 places limitations on the use of escrow accounts. Many larger escrow agents will have multiple safeguards that protect who can access the money being held for the client. So the answer is, YES, it’s the law, and those that disobey could face penalties or be liable for damages in a lawsuit.

FAQ

Why did I get an escrow disbursement?

If you received a message from your escrow agent, the disbursement was most likely initiated by your lender to pay the various fees associated with your property. Escrow payments can be made to cover homeowners insurance, HOA fees, and property tax. If you overpaid for any of these bills, you could receive a refund from the escrow account.

Why am I getting a mortgage insurance disbursement?

You are getting a mortgage insurance disbursement because these insurance payments need to be made. The lender is paying the insurance company or even themselves if they offer insurance on your behalf through escrow.

What should I do with my escrow refund check?

If your escrow balance is higher than it needs to be, and you receive a refund, be careful where you put the money. It’s not a bad idea to save or invest the money in case of unexpected expenses. Many brokerages now offer investment products that only require a small deposit.

Key takeaways

  • Escrow to mortgagor disbursement is the term used to define the process of a lender paying money for taxes, insurance, and other costs through an escrow account.
  • An escrow account is commonly used in finance and real estate transactions to facilitate security and avoid conflicts of interest.
  • In real estate, escrow accounts are used to hold money for a variety of costs, such as the deposit, mortgage funds, closing costs, and the funds to enable regular escrow disbursements from the lender on behalf of the borrower.
  • An escrow refund occurs when something, such as a property tax increase, changes the escrow terms or the monthly escrow payment amount.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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