Purchasing a home in NYC is far from cheap. For homes in NYC, the costs come not just from the price of the property but also the closing costs. The high taxes in New York mean that closing costs can be as high as 5-6% of the purchase price. For the past few years, the closing costs in NYC have been rising as lenders are forced to comply with the ever-changing mortgage regulations. So if there was any way to save on these costs you’d naturally want to hear about it right?
Enter the CEMA loan or Consolidated Extension Modification Agreement. This is a type of loan only available in New York. It’s often used by homeowners who are looking to refinance their mortgages. In some rare cases, you’ll also see homebuyers using it.
How does it work for refinancers?
The vast majority of CEMA loans go to homeowners who want to refinance their mortgage. The loan helps them to avoid paying full mortgage taxes on a second home loan. Instead of taking out a new mortgage and having to pay taxes on both, the CEMA loan allows you to combine and consolidate them into one. You then just need to pay the tax on the difference between the two.
For example, let’s say you want to refinance your loan and you have an existing principal balance of $100,000. The refinance with the new lender is for $150,000. By combining them into a new loan you’ll only have to pay a mortgage recording tax on the difference between the two, in this case, $50,000. Without the CEMA loan, you would have to pay tax on the full $150,000.
In NYC, the mortgage recording tax is 1.8% for mortgages under $500,000 (1.925% for those over $500,000). In the example above, the taxes without a CEMA loan would be $2,700. With the CEMA loan, it’s only $900, plus any CEMA fees from the lender.
How does it work for buyers?
For homebuyers, a CEMA purchase, also known as a “splitter” involves consolidating the two loans from buyer and seller into one. For this, to work there must be a loan on both sides of the transaction. Through this, a seller who is still paying off their mortgage transfers it to a buyer who is taking out a mortgage. The buyer now only has to pay the recording tax on their loan, minus the remaining loan balance they are taking on from the seller.
As for the seller, they save money on their transfer taxes by only paying taxes on the sale price of the home, minus the remaining mortgage debt that is being transferred to the buyer.
Things to consider with CEMA loans
It’s not all good news with CEMA loans, as with most things there are a few catches. For starters, these loans are only available for condos and townhouses. Co-ops do not come with mortgage recording taxes because they are not considered real property.
The CEMA loan comes with fees, the cost of which is up to the bank to decide. The process is also a lot easier when done through your current lender since you don’t need approval for reassigning the loan. However, if you’re switching banks your first lender has to approve assigning the mortgage to the new one.
The downside for buyers is that splitters are uncommon. It’s quite rare to see two banks agree on a CEMA loan. This may change in the future if we see interest rates climb enough that the difference in savings outweighs the cost. Only time will tell.