Understanding Mortgage CEMA in New York State

In New York State, a Consolidation, Extension, and Modification Agreement (CEMA) is an advantageous mortgage option for homeowners looking to refinance their mortgage. CEMA allows borrowers to avoid paying the full mortgage recording tax on the entire loan amount, potentially saving thousands of dollars during a refinance. Here's what you need to know about Mortgage CEMA in New York:

What is a CEMA?

A CEMA is a refinancing strategy that combines the remaining balance of an existing mortgage with a new loan into a single, modified loan. Instead of paying a mortgage recording tax on the full loan amount, homeowners are only required to pay taxes on the difference between the old and new loan balances, offering significant savings.

Why is CEMA Important in New York?

Mortgage recording tax rates in New York can be as high as 2.175% of the loan amount in certain counties like New York City, making it an expensive affair for homeowners to refinance. With a CEMA, this tax burden is reduced since borrowers only pay taxes on the incremental increase in their loan amount. For example, if you're refinancing a $500,000 loan and only taking out an additional $50,000, you’ll only be taxed on the $50,000 difference, not the entire $550,000.

Key Benefits of a CEMA

1. Significant Tax Savings: One of the biggest draws of a CEMA is the ability to save on the mortgage recording tax. For larger loan amounts, these savings can be substantial.

2. Lower Closing Costs: Since the mortgage recording tax is a considerable portion of closing costs, CEMA can lower the total amount of money needed to finalize the refinancing process.

Who Can Benefit from a CEMA?

Not all borrowers qualify for a CEMA. Typically, it is available to those who are refinancing a mortgage and have an existing loan with a lender willing to participate in the CEMA process. It’s important to note that CEMA transactions are specific to New York State due to its unique mortgage recording tax laws, so this option is not available in other states.

The CEMA Process

1. Approval from Lenders: Both your current lender and the new lender must agree to the CEMA process. Your existing lender must transfer the outstanding mortgage balance to the new lender through an assignment.

2. Preparation of Documents: The CEMA agreement consolidates the original mortgage with the new loan. This document needs to be carefully prepared and executed by all parties involved.

3. Mortgage Recording: Once the CEMA is finalized, it is recorded with the county clerk, and you are only responsible for paying taxes on the new money being borrowed, not the full loan amount.

4. Closing Costs: Although CEMA reduces your mortgage recording tax, there are still fees associated with processing the agreement.  Request an analysis from your mortgage broker or lender.

CEMA for Homebuyers

While CEMA is most commonly used in refinancing, it can also benefit homebuyers who are purchasing a property and assuming an existing mortgage. By assuming the seller’s mortgage and combining it with their new loan, buyers can also avoid the mortgage recording tax on the original loan balance.

Is CEMA Right for You?

CEMA can be a powerful tool for saving money, but it’s not suitable for everyone. If your loan amount is relatively small, the costs of completing a CEMA may outweigh the savings. On the other hand, for larger loans or in high-tax areas like New York City, the savings can be well worth the effort.

Final Thoughts

Mortgage CEMA is a unique feature of New York’s real estate market, offering significant tax savings to those refinancing their homes. By understanding how the CEMA process works and consulting with your mortgage broker or lender, you can potentially save thousands on your refinancing costs.  It may be the key to reducing your closing costs and improving your overall financial outcome.