What Is a Surplus Disbursement From My Mortgage Company?
Navigate receiving unexpected funds from your mortgage company. This guide explains the nature of these disbursements and how to manage them.
When you own a home with a mortgage, you might encounter situations that lead to unexpected financial adjustments. One such event is receiving a surplus disbursement from your mortgage company. This article aims to clarify what a mortgage surplus disbursement means and how it impacts your homeownership.
Understanding a Surplus Disbursement
A surplus disbursement from your mortgage company indicates that your escrow account holds more funds than necessary to cover its designated payments. An escrow account is typically established by your lender to collect and hold money for expenses like property taxes and homeowner’s insurance, which are then paid on your behalf.
This excess can arise for several reasons. For instance, your mortgage company might have initially overestimated the projected costs for your property taxes or insurance premiums. Additionally, a decrease in your actual property taxes or homeowner’s insurance rates during the year can lead to extra funds. Adjustments due to property reassessments or changes in insurance policies also contribute to an escrow surplus.
How Surplus Funds Are Determined
Mortgage companies determine surplus funds through a routine process called an annual escrow analysis. This analysis is typically conducted once a year to assess the financial activity within your escrow account. During this review, your mortgage servicer compares the total amount collected from your monthly payments against the actual expenses paid out for property taxes and insurance over the past year.
Federal regulations, such as the Real Estate Settlement Procedures Act (RESPA), require mortgage servicers to perform these analyses to ensure escrow accounts are properly balanced. The servicer projects the anticipated costs for the upcoming 12 months and determines if the current balance, along with future payments, will be sufficient. A surplus is identified when the funds collected exceed the disbursements needed, creating an excess balance.
Options for Handling Your Surplus
When a surplus is identified in your escrow account, you generally have options for managing these funds. The most frequent option is to receive a refund directly from your mortgage company. If the surplus amount is typically $50 or more, the mortgage company will often issue a check or direct deposit to you within a specified timeframe, usually around 30 days after the escrow analysis is completed.
Another option offered by some mortgage companies is to apply the surplus directly to the outstanding principal balance of your loan. This choice can be beneficial as it reduces the total amount of interest you will pay over the life of the mortgage and could potentially shorten your loan term. The decision between receiving a refund or applying the funds to your principal often depends on your current financial goals and the size of the surplus.
Important Considerations
When you receive a mortgage surplus disbursement, it is important to understand its implications, particularly concerning taxation. A surplus disbursement from an escrow account is generally not considered taxable income. This is because the funds represent a return of your own money that was overpaid, rather than new income. However, if you deducted property taxes in a prior year and then received a refund for those taxes as part of the surplus, you may need to adjust your tax deductions for that year.
It is advisable to review your annual escrow analysis statement when it arrives. This statement provides a detailed breakdown of how the surplus was calculated, including past activity and projections for the next year. Should you find any discrepancies or have questions about the calculation, promptly contact your mortgage servicer for clarification. Be prepared to provide relevant documents, such as property tax bills or insurance statements, to support your inquiry. While a surplus leads to a disbursement, the mortgage company will also typically adjust your future monthly escrow payments based on the new analysis.