How a CEMA Can Save You Thousands in Mortgage Taxes
What is a CEMA?
In New York State, refinancing a mortgage or purchasing a home triggers a mortgage tax. New York homeowners can reduce their tax liability with a Consolidation, Extension and Modification Agreement (“CEMA”). A CEMA consolidates the old, outstanding, mortgage debt and the new debt so you only pay taxes on the difference between the two loan amounts or what is called the “new money”.
When you enter into a CEMA with a lender, you agree to combine or consolidate the old and new mortgages so you do not have to pay the state transfer tax on the full mortgage balance which can result in thousands if not tens of thousands of dollars in savings. CEMAs typically apply to refinance transactions, however, you can use a CEMA when purchasing a home under certain circumstances. This type of agreement is referred to a Purchase CEMA. Purchase CEMAs can be attractive to prospective purchasers because the purchaser could save significantly on the mortgage tax. Note, generally, the lender must agree to participate in a CEMA.
What is the Tax Savings on a CEMA?
In New York, you pay the mortgage tax based upon the purchase or refinance of the property. If you are refinancing, without utilizing a CEMA, you pay taxes again on the entire refinance amount on the property. If you utilize a CEMA, you are only taxed on the difference between the unpaid loan amount and the new loan amount. For example, if the unpaid mortgage balance at the time of refinance is $750,000 and the refinance loan amount is $800,000, you only pay the mortgage tax on the difference between the two i.e. the new money which is $50,000. Mortgage tax rates vary on where the property is located, however, by utilizing a CEMA, thousands (even tens of thousands) of dollars can be saved. In New York City, the mortgage tax rate on a residential property where the consideration is $500,000 or less is 2.05% and if the consideration is more than $500,000, then the tax rate is 2.175%. In the above example, the mortgage taxes due on the new money ($50,000) would be $1,025.00 ($50,000 x 2.05%), whereas, if you did not enter into a CEMA, the mortgage taxes on the full new loan would amount to $17,400 ($800,000 x 2.175% = $17,400). That is a savings of $16,300!
What is the Cost of Utilizing a CEMA?
CEMAs are not without cost. The assignment bank (your old lender) will charge a fee to assign the mortgage to your new bank and the assigning lender’s attorney will charge you a fee to prepare the assignment. These fees generally cost approximately $1,000 – 1,800 depending on your old lender.
As you can see, in many instances, the CEMA saves the property owner money because the amount owed is based on the difference between the old mortgage amount and the new mortgage amount, rather than solely on the new mortgage amount. It should be also noted that it can take the assignment bank time to locate your collateral documents and to complete the assignment. Depending on the assignment bank, this process can take anywhere between 4 – 8 weeks. It is therefore imperative that the CEMA process is started as soon as possible in the closing process.