What Is Tax Disbursement on a Mortgage?
Understand tax disbursement on a mortgage. Learn how your property taxes are managed and paid through your lender and escrow account.
Tax disbursement on a mortgage refers to the process where a mortgage lender collects funds from the homeowner to pay property taxes on their behalf. This arrangement is a common feature of many mortgage agreements, designed to ensure that property tax obligations are met. The mechanism for this collection and payment typically involves an escrow account, which holds the funds until they are due to the taxing authorities.
Understanding Escrow Accounts
An escrow account, in the context of a mortgage, is a dedicated account managed by the mortgage lender. Its primary purpose is to hold funds collected from the homeowner for specific property-related expenses, most commonly property taxes and homeowner’s insurance premiums. Lenders require or prefer these accounts to safeguard their investment in the property, as unpaid property taxes can result in tax liens that take precedence over the mortgage lien.
Funds for the escrow account are collected monthly as part of the homeowner’s regular mortgage payment. This combined payment includes the principal and interest on the loan, plus a portion allocated to the escrow account for anticipated tax and insurance payments. The lender then holds these accumulated funds until the property tax bills become due. This systematic collection helps homeowners budget for large, infrequent expenses like annual or semi-annual property taxes, preventing a single large payment burden.
The Disbursement Process for Property Taxes
The process of disbursing property taxes from an escrow account begins with the mortgage lender’s responsibility to monitor tax due dates. Lenders maintain a schedule of property tax payment deadlines for all properties for which they manage escrow accounts. As the due date approaches, the lender receives the property tax bill directly from the local taxing authority.
Upon receiving the tax bill, the lender verifies the amount against their records. Once verified, the lender uses the accumulated funds in the homeowner’s escrow account to pay the property taxes. This payment is typically made electronically or via check, ensuring timely remittance. After the payment is successfully processed, the homeowner usually receives a notification or a statement from their lender confirming that the property taxes have been paid from their escrow account.
Your Escrow Account and Property Taxes
Homeowners with an escrow account should actively engage with the information provided by their lender regarding property tax disbursements. Lenders perform an annual escrow analysis to review the account’s activity and project future tax liabilities. The purpose of this analysis is to ensure that enough funds are being collected to cover upcoming property tax payments and to adjust the monthly escrow portion of the mortgage payment if necessary. Homeowners receive a statement detailing the results of this analysis, which outlines any changes to their monthly payment.
If the analysis reveals an escrow shortage, the lender will typically adjust the monthly mortgage payment upward. Homeowners may also have the option to pay the shortage as a lump sum to avoid an increase in their monthly payment. Conversely, an escrow surplus occurs when the account has collected more funds than needed; in such cases, the lender is generally required to return the excess funds to the homeowner.