What Is Escrow Disbursement: Definition, Advantages, and Disadvantages
July 3rd, 2022
An average homeowner has many expenses. From mortgage payments to living costs - it is sometimes hard to keep track of all things there are to be paid during the year. So it's no wonder you might panic when you get to an escrow disbursement. If you don't know what that is, you might think to yourself ''What now?''
Even before becoming a homeowner, it is best to get familiar with some processes and reasons behind them, so as not to get taken by surprise along the way. Escrow can be a confusing term because there are two types of escrows in real estate, but once you understand the difference between them it will be easier to grasp the concept of escrow disbursement.
What is Escrow in Real Estate
The real estate industry uses tools and regulations to protect the people who enter the market, as well as those who provide the services. An escrow is just that - a bank account run by an impartial third party that holds the borrower's or buyer's money.
An escrow can be the intermediary that holds earnest money during the home sale, or a bank account that collects homeowner fees during the year, so you don't have to pay an annual lump sum. Both of them have a distinct role in real estate transactions.
An escrow transaction during the sale helps to protect both sellers and buyers from breaking the sales contract. This escrow account closes at closing, after which you open a more long-term account for escrow funds. Most lenders will require you to open an escrow account.
Escrow accounts that exist during the life of the loan are there to ensure you are paying your dues. In addition to paying monthly mortgage payments, plus interest - a sum of money will be transferred to your escrow account, to cover insurance and property taxes.
PITI Payment
Real estate agents use abbreviations to explain common real estate transactions and processes. Therefore, they often use the acronym PITI payment to explain the whole sum of a monthly mortgage payment - Principal + Interest +Tax + Insurance.
Principal refers to the part of the loan you are actually paying off that month. Interest is pretty self-explanatory - depending on a mortgage rate you’ve unlocked, you are paying interest on a principal. This money goes directly to the bank account of your lender.
The other part of most monthly payments is transferred to an escrow account. Funds in escrow are collected throughout the whole year and you cannot spend them. Rather, an escrow officer collects your money and makes annual payments of such costs in your name.
Both property taxes and homeowner insurance installments are usually due in December, so an escrow account spares you from making a sum payment during the holiday season.
Escrow Disbursement
Escrow disbursement is actually the act of dispensing the escrow money, in this case on property taxes and insurance policies. Each escrow officer has a contract that obliges them with the responsibility of making a money transfer at a certain time of the year.
When a buyer makes regular monthly payments to an escrow fund, it is entirely the escrow officer’s legal responsibility to make payments on time, otherwise, they can be facing a lawsuit.
An escrow disbursement can refer to the buyer-to-seller transaction upon purchasing a house. When all the conditions from the sales contract are met, and both parties are ready to sign closing papers - that’s when an escrow disbursement of earnest money occurs.
An escrow agent will then release the buyer’s money from the escrow account into the seller’s private bank account. Earnest money deposits are almost always regulated using the escrow account for added protection.
Escrow disbursement for tax and insurance payments is something that a homeowner gets notified about so they can keep track of their obligations. However, they don’t need to set aside money and make a thousand-dollar payment during the busiest time of the year.
Escrow Disbursement Refund
If you are lucky, you might get an escrow disbursement refund check in the mail upon the next escrow account analysis. The most common way to get a refund is to pay off your loan entirely and sometimes even when you’re refinancing - if the tax or the insurance is lowered. It doesn’t have to be a huge check, but it certainly puts a smile on your face and unplanned money in your pocket.
Depending on the location, property description, and how much you’ve paid upon closing, you could be seeing up to a few thousand dollars on the refund check. This could happen to you a couple of weeks after an escrow account analysis, or 20 days from when you paid off your mortgage.
When you’re refinancing your mortgage you could be having an escrow disbursement refund only when you’re changing lenders who are working with different escrow servicers.
Moreover, if any kind of change happened just after an escrow disbursement came through, you might not be getting a large refund, as the money has already been used to pay expenses. The money you get from an escrow refund is yours and you can spend it however you want.
Who Manages Escrow Accounts?
Escrows upon purchases are usually run by a title company, but homeowners’ escrows are dealt with by a lender and a mortgage servicer. A mortgage servicer is getting your payments and passing them onto tax authorities, investors, and insurers.
Most people work with their lenders’ mortgage servicing companies, but you can always choose your own escrow holder. You want them to be responsible and reliable. It’s not only about collecting and holding the money, it’s about precise estimations of expenses, as well as fair refunds if they’re due.
The biggest downside of an escrow is that it creates higher monthly expenses for the homeowner, but it assures the funds for annual financial obligations. Many people would save up, but put their hand in that jar as soon as things start to heat up. The escrow holder is making it impossible to stip yourself out of that money.
How to Find a Reliable Escrow Servicer?
Finding a reliable escrow servicer is easy with Lightspeed Escrow. If you are in search of a specialized escrow holder and you live in Southern California, contact us and our first available officer will contact you immediately. We are dealing with both real estate and homeowner escrow disbursement, so you can rely on us from the beginning.