Escrow to Mortgagor Disbursement: What Does It Mean?

If you’re applying for a mortgage loan to buy a house, chances are your loan lender will want you to set up an escrow account. Choosing a mortgage lender who’s seasoned and experienced is crucial, as they’ll not only guide you through the loan process but also ensure proper handling of your escrow account and timely escrow-to-mortgagor disbursements. And, ensure a timely escrow to mortgagor disbursement. Simply put, escrow to mortgagor disbursement is when a lender uses an escrow account to pay a borrower’s expenses. Often, lenders work with an independent escrow agency to manage this account.

What is an escrow account? How does it work?

Escrow involves a legal arrangement between two parties wherein they employ a neutral third party to receive and distribute funds or property once contract conditions are fulfilled. The third party, aka escrow agent, holds the earnest money deposit during a property sale. It ensures both the buyer and seller meet the conditions of the contract before finalizing the deal.

Therefore, escrow acts as a good-faith deposit, showing the buyer is serious. Moreover, it compensates the seller if the deal falls through.

Typically, the escrow agent is from the closing or title company. Once all conditions, such as home inspections, are met, the agent releases the funds, and the buyer receives the property title. And, if the buyer backs out at the last minute and breaks the contract, the escrow money compensates the seller for the time lost.

When is escrow used?

Apart from real estate transactions, escrow is common in online sales and the stock market to manage stock distributions.

In property deals, the escrow agent holds and releases funds according to the real estate contract between the buyer and seller.

Escrow services in online sales are used for buying rare or expensive items such as art or jewelry. The agent only releases payment to the seller after the item is delivered and authenticated.

In the stock market, companies use escrow to retain talent by offering stock bonuses to top executives. However, the recipients can’t sell the stock until a set escrow period has passed.

What are the different types of escrow accounts?

There are two types of escrow accounts.

Escrow accounts for homebuyers

In the homebuying process, the purchase agreement typically includes earnest money, a deposit demonstrating the buyer’s commitment to purchasing the home.

The buyer often determines the earnest money amount, usually ranging from 1 to 3% of the home purchase price. But sometimes, it can be as low as $250.

Keep in mind that a substantial earnest money deposit can make a buyer more competitive in the housing market.

If the buyer backs out of the contract, and it is their fault, the seller retains the earnest money. If the purchase is successful, the escrow agent adds the earnest money to the buyer’s down payment.

In some cases, an escrow holdback occurs, where the agent holds funds beyond the home sale completion. This could be to address situations such as the seller remaining in the home for an extra month. Or, to resolve issues found during a final property walkthrough.

Escrow accounts for homeowners insurance and future taxes

Here, the loan lender insists on an escrow account even after the home purchase. The idea is to assist in paying property taxes and homeowner’s insurance, integrating them into the monthly payments.

The mortgage servicer holds a portion of the monthly mortgage payments in escrow after closing until the buyer’s insurance and tax payments become due.

What is escrow disbursement?

Escrow to mortgagor disbursement refers to the process by which funds held in an escrow account are disbursed to the mortgagor, who is typically the homeowner. In a mortgage context, an escrow account is set up by the lender to hold funds, separate from the mortgage loan, to cover specific recurring expenses related to the property.

How does escrow to mortgagor disbursement work?

Let’s understand the breakdown of the escrow to mortgagor disbursement process.

Create an escrow account

When a borrower obtains a mortgage loan, the lender may require the setting up of an escrow account. This account serves as a holding area for funds to cover certain expenses associated with homeownership.

Understand the components of escrow

The escrow account typically includes funds for property taxes, homeowner’s insurance, and, in some cases, other related costs such as private mortgage insurance (PMI) or homeowners association (HOA) fees.

Regularly contribute to the account

As part of the monthly mortgage payment, the borrower makes contributions to the escrow account. The lender manages and administers this account on behalf of the borrower.

Keep an eye on your property tax and insurance payments

When property taxes and homeowner’s insurance premiums become due, the lender uses the funds in the escrow account to make these payments on behalf of the homeowner. This ensures that the essential expenses are covered and that the property remains adequately insured.

Be a part of the escrow analysis

Periodically, the lender conducts an escrow analysis to reassess the amounts needed in the escrow account. This analysis takes into account changes in property taxes, insurance premiums, and other factors. Adjustments to the monthly escrow contributions may be made based on this analysis.

Be mindful of the surplus or shortage of funds

If there is a surplus in the escrow account (more funds than needed), the excess may be returned to the homeowner. Conversely, if there is a shortage (insufficient funds to cover expenses), the lender may adjust the monthly escrow contributions or allow the homeowner to make a one-time payment to cover the shortfall. Escrow to mortgagor disbursement occurs when there are excess funds in the escrow account, and the lender returns this surplus to the homeowner. This disbursement is typically in the form of an escrow refund check or a direct deposit.

When can you get a refund from the escrow account?

There are certain situations when you might receive a refund from the escrow account that facilitates the mortgagor disbursement.

When the loan is fully repaid

Once your mortgage is complete, the lender no longer bears the responsibility of overseeing your insurance and property tax payments. Consequently, they will close the account and reimburse any remaining funds to you within 20 days of the loan closing.

If you decide to sell the house

When you sell a property, the requirement for an escrow account for mortgage disbursement ceases. Nevertheless, if you purchase a new property with a mortgage, you will need to undergo the same escrow process as you did for the initial property.

When there are adjustments in costs

Should the cost of your homeowner’s insurance or any other insurance decrease, you have the option to request a refund from the escrow.

If there are fluctuations in taxes

While property taxes typically increase, there is always a possibility of a decrease. And in such cases, you can seek a refund. Conversely, if property taxes rise, you will be required to contribute more funds to your escrow account.

Key takeaway

The presence of an escrow account eases the financial strain of paying substantial annual expenses such as property taxes or insurance. Your lender systematically allocates a portion of your monthly mortgage payment to cover these costs. During their annual escrow analysis, the mortgage company or lender may identify either an excess or a shortage of funds in the escrow balance. If there’s a surplus, the homeowner may expect to receive an escrow refund covering the remaining balance. Escrow to mortgagor disbursement happens when funds in an escrow account are disbursed to the mortgagor, who is generally the homeowner.

FAQs

Who opens the escrow account?

The seller’s real estate agent usually opens the escrow account. However, it can also be done by an attorney or a closing or title company agent.

How is escrow calculated?

Escrow amounts can vary each year as taxes and insurance premiums change. Your mortgage servicer calculates your monthly escrow payments based on previous bills and often requires you to keep at least two months’ worth of extra payments in the account to cover future costs.

What happens if there’s too much or too little in escrow?

If your lender collects more than needed for taxes or insurance, you’ll receive an escrow refund. If they didn’t collect enough, you can either make a one-time payment or increase your monthly mortgage amount to cover the difference.

Can escrow be waived?

Escrow can be waived under certain conditions, like if you’ve made 12 on-time mortgage payments and your loan-to-value ratio is 80% or lower. Lenders may have specific requirements for an escrow waiver.

Can escrow close early?

Yes, escrow can close early if all parties meet the necessary conditions and everything goes smoothly.

Why does escrow go up?

Escrow can increase if property taxes or insurance costs rise. It can also go up if your mortgage servicer finds that your account doesn’t have enough funds to cover future payments.

What is escrow to mortgagor disbursement? was last modified: July 18th, 2025 by Ramona Sinha

Written by Ramona Sinha. February 18, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.