CEMA Loans: What to Know Before You Refinance in New York

Cardinal Financial June 4, 2019 | 5 min read
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Are you a homeowner in New York looking to refinance? You’re in luck. We’ve got the inside scoop on a loan you should know about. It’s called the CEMA loan and it can help homeowners in New York save money on their mortgage taxes. Interested? Read on.

What Is a CEMA Loan?

CEMA stands for Consolidation Extension and Modification Agreement. For homeowners in the state of New York who are looking to refinance, it’s a process that can help them save money on their mortgage taxes. 

  • Consolidation means the combining of two mortgages (the existing mortgage and the gap mortgage) into one.
  • Extension refers to the note, aka the document you sign at closing that details your loan terms. If the mortgage has less than 30 years left on it, it will likely be extended to match the term of the new loan. 
  • Modification means that the terms of the old mortgage are being modified through the CEMA according to the terms of the new loan.

Wait, what’s a gap mortgage? When you’re refinancing your home loan, you’ll have the principal unpaid balance (PUB) on the existing loan and the “gap” amount. The gap amount is the difference between the PUB and the new loan amount. The PUB is secured by the existing mortgage and assigned to the new lender. The gap amount, however, is secured by the gap mortgage, which is recorded after closing. In the end, both mortgages are consolidated to form one lien through the CEMA.

Why get a CEMA loan?

CEMA loans can help homeowners in the state of New York avoid paying all or some of the mortgage tax on their refinance. Especially if your tax savings outweigh the cost to get a CEMA, you could save some serious cash. Savings are based on the mortgage tax rate in the borrower’s county, the principal unpaid balance on their existing loan, and the fees they incur in obtaining the assignment. The assignment is required and charged by the borrower’s payoff bank in order for the CEMA to take place.

In the mortgage world, assignment is when the original lender transfers the loan to a new lender. This means your payments will start going to that new lender. When you close on your home loan, you may be asked to sign a document that gives your lender the right to assign your mortgage to a different lender. Even though the lender changes when your mortgage is assigned, the terms you agreed to when you closed on the loan won’t change.

What are the downsides to a CEMA loan?

If you opt for a CEMA loan when you refinance your mortgage, you may have to pay an upfront fee to initiate the CEMA, and it may not be refundable. This can be a drawback to borrowers, especially when you’re refinancing—and doing a CEMA—to save money. For some, it can feel like one step forward, two steps back. But, if the tax savings outweigh the cost of the upfront fee, it may still be worth it.

How does a CEMA loan refinance work?

When you take out a home loan, you’ll need to file the mortgage deed with your county. This is called recording. When the mortgage is recorded, the mortgage tax is assessed. The majority of the time, the existing loan in a refinance transaction is paid in full. Once the old lender is paid off, they will provide a satisfaction for the mortgage, or “discharge” it. In New York, when you satisfy a loan upon payoff and record a new mortgage under a new lender, you will incur a mortgage tax on the full amount of the new mortgage.

If the old lender is willing to assign the mortgage to the new lender, the borrower doesn’t need to record a full-on new mortgage. In that case, they really only need to record a mortgage for the difference between the loan amount and the PUB. This is typically a much smaller amount, therefore, the tax is much less.

The key to the CEMA loan process is that the existing lender assigns the mortgage to the new lender instead of satisfying it. In other words, you don’t pay off the current loan and take out a new one like you would in a typical refinance. Instead, the debt is simply transferred to a new lender, but it is still the same loan. This is why CEMA loans are sometimes called “New York Assignments.”

How to calculate your CEMA loan refinance

The money you can save with a CEMA loan can be calculated like this: Take the principal unpaid balance from your current home loan and multiply that number by your county mortgage tax rate. From that, subtract the bank and recording fees. Your loan originator or financial advisor can also help you crunch the numbers.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

CEMA stands for Consolidation Extension and Modification Agreement. If you’re a New York homeowner looking to refi, it can help you save money on your mortgage taxes.

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