CEMA Loans Guide

By PropertyClub Team
Aug 2nd 2022
The Consolidation, Extension, and Modification Agreement, or CEMA loan, is a special type of mortgage available only to New Yorkers. A CEMA is typically used to reduce the tax burden associated with refinancing a loan.

hash-markTable of Contents

What Is a CEMA?
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

hash-markWhat Is a CEMA?

CEMA stands for Consolidation, Extension, and Modification Agreement. This type of loan is only available for New Yorkers and is typically used for refinancing mortgages. As we all know, New York City has one of the heaviest tax burdens in the nation, in part thanks to the mortgage record tax. A CEMA loan consolidates your existing mortgage with your new one, reducing the amount of mortgage tax you owe.  

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.

hash-markHow 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.

hash-markCEMA 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 be purchasing 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. 

hash-markCEMA Loan Example

Here's an example of a scenario where a CEMA loan could save you money. 

  • New Loan Amount: $400,000
  • Unpaid Mortgage Balance: $200,000
  • Mortgage Recording Tax: 1.8%
  • CEMA fees: $750

In the above example, a new $400,000 mortgage would result in a 1.8% mortgage tax, costing you $7,200. 
However, if you decided to use a CEMA loan, your costs would only be $4,350, meaning you'd save $2,850. 

hash-markCEMA Loans Benefits

Without obtaining a CEMA loan, if you were to do a traditional refinance, you are essentially responsible for paying the mortgage recording tax on both loans. However, with a CEMA loan, you are consolidating the old loan with the new loan, and you only pay taxes on the difference. For example, if your principal unpaid balance on your existing mortgage is $100,000, and then you refinance your mortgage for $200,000, you will only pay the mortgage recording tax on the $100,000 difference instead of the entire $200,000. 

hash-markUnderstanding CEMA Fees

CEMA fees are at the discretion of each bank/lender. The lender may charge up to a $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. 

hash-markHow 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)

hash-markExpect 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, more than likely, you will 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. 

hash-markCEMA Loans Bottom Line

CEMA loans are a fantastic option for New Yorkers that are refinancing as they help avoid the NY mortgage recording tax. Historically, every time an owner wanted to refinance their home in New York they would have to pay the mortgage tax on the new financed amount. By using a CEMA, homeowners can reduce this tax significantly. Although it takes a bit longer to close on a CEMA mortgage, it's well worth it as you can save thousands of dollars.