When you own a home, there will come a time when you need to refinance your mortgage. Refinancing involves replacing your current mortgage with a new one, often with different terms. You might get a better interest rate and lower monthly payments. You might also refinance and take out some cash to work on your new renovation.
Just like when you apply for a new mortgage, when you refinance, there are often fees and closing costs involved, but they can vary from lender to lender and from state to state.
In New York, homeowners who finance and refinance their home purchase need to pay a 0.5% mortgage recording tax. In addition to the state tax, New York City, Yonkers, and a few other counties also apply local tax for recording a mortgage. For instance, in New York City, for mortgages under $500,000, the recording tax is 1.8% (including the state portion) and 1.925% for mortgages above $500,000.
What does this mean? Suppose you are looking to refinance your home for $400,000. You will need to pay an extra $2,000 just to cover the mortgage recording tax, on top of other closing costs such as origination fees, appraisal fees, etc. In New York City, this number goes up to $7,200.
How the math works
Scenario 1: New York State
- Refinance loan balance = $400,000
- State mortgage recording tax rate = 0.5%
- Mortgage recording tax = $400,000 x 0.5% = $2,000
Scenario 2: Counties with local mortgage recording tax
- Refinance loan balance = $400,000
- Local + state mortgage recording tax rate = 1.8%
- Mortgage recording tax = $400,000 x 1.8% = $7,200
Thankfully, there is a way you can drastically reduce the cost of refinancing, and that is through using a CEMA loan. In this guide, we’ll look at what CEMA loans are, how they work, their benefits and drawbacks, and so much more.
What is a CEMA Loan, and How Does it Work?
CEMA stands for Consolidation, Extension, and Modification Agreement. It’s a program exclusively for New Yorkers that lowers the cost to refinance a mortgage by reducing the amount of mortgage recording tax they have to pay.
When a traditional refinance takes place, you essentially take out a new mortgage loan to replace and pay for your old one, often with new terms and rates. However, with a CEMA loan, you are simply modifying your existing debt obligation into a new loan. This consolidation means that you only need to pay the mortgage recording tax on the difference between the amount of your new loan and your existing principal balance.
For example, say your current mortgage balance is $300,000, your local tax rate is 1.8%, and your new loan is $400,000. Instead of paying $7,200, you only need to pay $1,800, based on the difference of $100,000. In other words, you’ll save $5,400 on the mortgage recording tax by refinancing with a CEMA loan.
How the math works
- Current mortgage balance = $300,000
- New mortgage balance = $400,000
- Difference between current and new mortgages = $100,000
- Local + state mortgage recording tax rate = 1.8%
- Mortgage recording tax without CEMA = $400,000 x 1.8% = $7,200
- Mortgage recording tax with CEMA = $100,000 x 1.8% = $1,800
- Total savings = $7,200 – $1,800 = $5,400
While it varies case by case, this could mean thousands of dollars in savings for homeowners. A CEMA loan is traditionally used to refinance a home, but there are rare occasions where it can be for new home purchases, too. All homeowners can likely benefit from a CEMA, but it is especially helpful when the loan has a high remaining balance.
Pros and Cons of a CEMA Loan
To truly get a sense of these loans and whether they are the right fit for you, you need to take an honest look at their main benefits and drawbacks. The first and most obvious benefit of a CEMA mortgage is that it can save you money. By only paying a portion of this mortgage recording tax instead of on the total balance of the new loan, most homeowners can save thousands.
The major drawback of a CEMA loan is its strenuous process. It requires approval from the state as well as previous lenders. Because of the requirements, it often takes well over two months to close, whereas a conventional refinance might only take a month or less. If you need to close quickly or simply aren’t very patient, a CEMA loan might not be for you.
What are the Requirements for a CEMA Loan?
CEMA loans come with a few requirements. First, you need to be a New York resident to take advantage of CEMA.
Next, while CEMA loans work for many types of properties, they will not work for co-ops, as personal shares in co-ops are not considered real estate. So, if you own a co-op, you will need to work with a lender that offers conventional loans.
Another requirement is actually finding a lender that offers CEMA loans. Not all lenders work with CEMA loans, so be upfront about your desire as early as possible. If possible, try and stay with your current lender when getting a CEMA, as changing lenders can introduce more costs and take even longer.
The Process of Getting a CEMA Loan
As briefly mentioned earlier, the process of getting a CEMA loan can be a long one. The first step is to express your interest in a CEMA with your lender. Since the process involves a lot of paperwork, we recommend that you let your lender know as early as possible.
If your current lender works with CEMA loans, you’ll likely be able to close it faster and avoid most additional fees. However, if your lender doesn’t offer such an option, you will have to find a new lender. Switching lenders could potentially introduce more fees. The process might also take longer as you’d need your current lender to approve assigning your existing mortgage to a new one. Remember to compare the costs if you need to switch lenders. The costs incurred might be greater than the savings on the mortgage recording tax.
Once your application is submitted, it’ll take a while for the lender to process the application and get the state’s approval. The whole process can take anywhere from 30 to 90 days. While the process is long and stressful at times, this is still an excellent option to consider if you are patient and able to wait.
