What Is Escrow to Mortgagor Disbursement?

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.

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.

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.

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.

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.

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.

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.

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:

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.

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.

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,

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.

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.

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.

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.

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.

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.