What is a CEMA loan?

The PropertyClub Team
May 13th 2019
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. CEMA loans, which stands for Consolidation, Extension, and Modification Agreement, are a type of loan available only to New Yorkers that is typically used to reduce your tax burden when refinancing a mortgage.

All about CEMA Loans

The New York State Mortgage Recording Tax is a large amount of the closing cost for a purchase or a refinance. Technically the 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. Co-op buyers and owners do not pay a Mortgage Recording Tax as coops are not considered real property.

Historically, every time an owner wanted to refinance their home; they would have to pay the New York State mortgage tax on the new financed amount
Fortunately, there is now a new option, called a CEMA loan,  that homeowners can use to reduce this tax significantly.

What’s a CEMA Loan?

CEMA stands for Consolidation, Extension, and Modification Agreement. This type of loan is only available for New Yorkers and is typically used for refinancing of mortgages. In the extremely rare circumstance, a CEMA loan may be used for a 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.

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.

The Benefit of CEMA Loans

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. To the contrary 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.

Understanding 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. 

How to Calculate the NET CEMA savings

To calculate whether doing a CEMA loan makes sense follow these steps.

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

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.