Table of Contents
How Do CEMA Loans Work?
CEMA Requirements
CEMA Loan Example
CEMA Loan Benefits
Understanding CEMA Fees
How To Calculate the NET CEMA Savings
Expect Longer Closing Times For a CEMA Mortgage
CEMA Loans Bottom Line
How Do CEMA Loans Work?
CEMA loans work by consolidating and modifying your existing mortgage and your new one to lower your New York mortgage taxes. Instead of paying the mortgage tax on the entire value of your new loan, you'll only pay it on the difference between your new mortgage and the unpaid balance of your existing loan. The New York State Mortgage Recording Tax is a large amount of the closing cost for a purchase or a refinance, so a CEMA can save you a lot of money.
Technically the mortgage tax rates are 2.05% for loans below 500K and 2.175% for loans over $500K. However, typically, the buyer’s lender pays 0.25% of the MRT, which makes the effective Mortgage Recording Tax rates in NYC 1.8% for loans under $500K and 1.925% for loans over 500K. NYC co-op buyers and owners do not pay a Mortgage Recording Tax as coops are not considered real property.
The benefit of obtaining a CEMA loan is that you only pay taxes on the difference between your new loan and the unpaid principal balance of your current loan. Therefore, a borrower takes out a CEMA loan to avoid paying all or part of the Mortgage Recording Tax.
In extremely rare circumstances, a CEMA loan may be used for a home purchase. You cannot get a CEMA loan if you have a VA loan, as this type of loan is only available on conventional, jumbo, and FHA refinances. Additionally, CEMA loans are only available to those refinancing condos, houses, and townhouses, and it doesn’t apply to coops because coops are not real property.
CEMA Requirements
To qualify for a CEMA mortgage, you need to have an existing mortgage in the state of New York. You'll also need to purchase real property in New York as CEMA loans are only available to NY State residents. That means only purchases of condos, townhouses, and single-family homes are eligible, as co-ops aren't considered real property.
If you meet the requirements, the next step will be to find a lender that works with CEMA loans. It's usually best if your current lender offers CEMA mortgages, but that's not always possible.
CEMA Loan Example
Suppose a homeowner has an existing mortgage of $400,000 and wants to refinance to a new loan of $450,000. Without a CEMA, they would need to pay the mortgage recording tax on the full $450,000. With a CEMA, they only pay the tax on the $50,000 difference between the old and new loans.
- Existing Mortgage Balance: $400,000
- New Loan Amount: $450,000
- Difference: $50,000
- Mortgage Recording Tax Rate: 1.8%
- CEMA fees: $750
Without CEMA:
- Mortgage Recording Tax: $450,000 * 1.8% = $8,100
With CEMA:
- Mortgage Recording Tax: ($50,000 * 1.8%) + $750 CEMA fees= $1,650
In this example, the borrower saves $6,450 in mortgage recording tax by using a CEMA.
CEMA Loans Benefits
1. Reduced Mortgage Recording Tax
The biggest benefit of a CEMA loan is the reduction in the mortgage recording tax. In New York, this tax can be quite substantial, so consolidating the loan helps to avoid paying the full tax on the new loan amount. Borrowers can save a significant amount of money by avoiding the full mortgage recording tax. This is particularly beneficial in areas with high property values.
2. Streamlined Process
The process for a CEMA mortgage is fairly straightforward with most lenders. Combining the old and new loans into a single mortgage can streamline and simplify the refinancing process and reduce the amount of paperwork involved.
CEMA Mortgage Fees
CEMA fees are at the discretion of each bank or lender. The lender may charge up to $1,000 and a percentage of the loan amount. The lender fees typically include CEMA, closing fees, assignment fees, and processing fees. It is essential to review the CEMA fees to determine whether or not taking out a CEMA loan makes sense financially.
Nevertheless, with few exceptions, CEMA loans are usually financially beneficial.
How To Calculate the NET CEMA Savings
To calculate whether doing a CEMA loan makes sense, follow these steps.
Step 1: First, calculate what the mortgage tax will be without a CEMA Loan: Mortgage tax = New loan amount times the tax rate (e.g. $200,000.00 x 1.8% = $3,600)
Step 2: Next, calculate the mortgage tax with CEMA,by taking the New loan amount minus the principal unpaid balance of old loan multiplied by the mortgage tax rate (e.g. 200,000 – 100,000 = 100,000 x 1.8% = $1,800)
Step 3: Subtract the result from Step 2 from the results in Step 1, to calculate your gross tax savings. (e.g. 3,600- $1,800 = $1,800.00)
Step 4: Subtract all CEMA fees and recording charges incurred by the CEMA, and that gives you the total savings from the CEMA. (e.g. 1,800 - 750 = $1,050 (Total Net Savings)
Expect Longer Closing Times For a CEMA Mortgage
When closing on a CEMA loan, the State of New York and your current lender must execute additional paperwork according to CEMA regulations to get your mortgage and title transferred properly to ensure that you are only paying the mortgage tax on the difference between your new loan and your existing loan.
If you refinance with your current bank, the process should be a lot easier. However, if you are attempting to refinance with a new lender, the existing lender has to approve assigning the mortgage to the new lender, which comes with additional fees. Additionally, even if you want to, you may not be able to refinance with a new lender. For example, some banks will not provide CEMA loans when refinancing with an outside bank. Additionally, in the event that the chain of title is broken and your bank has not retained copies of all the necessary paperwork, you will most likely be unable to obtain a CEMA loan. Overall, the typical turnaround time for a CEMA refinance can range from 30 days up to 90 days or longer. Therefore, if time is more important than saving money, you may want to look into taking out a regular refinance and paying the full mortgage recording tax.
CEMA Loans Bottom Line
A CEMA mortgage is a fantastic option for homeowners in New York who are refinancing, offering the potential for significant savings on mortgage recording taxes. By understanding the benefits and processes involved, borrowers can make an informed decision and potentially lower their refinancing costs. As always, consulting with a knowledgeable lender or financial advisor is recommended to navigate the specifics of a CEMA mortgage. Although it takes a bit longer to close on a CEMA mortgage, it's well worth it as you can save thousands of dollars.