Question: What is a CEMA loan?
Answer: CEMA stands for "Consolidation Extension and Modification Agreement."
Question: What is the purpose of doing a CEMA?
Answer: To avoid paying part or all of the New York mortgage tax on a refinance.
Question: Are there any disadvantages to a CEMA?
Answer: In order to start the process, borrowers must sometimes pay a fee to their existing lender. This fee may be non-refundable even if you do not complete a refinance.
Question: When should a borrower try to do a CEMA?
Answer: Whenever the borrower can save a significant amount of money.
Questions: How can I determine how much money a borrower will save?
Answer: The net amount a borrower can save is based on three things:
1. Tax Rate- Each county in New York State has its own rate and some depend on loan size. (For example, the NYC rate is 1.8% on loans less than $500,000 and 1.925% on loans greater than $500,000. In Westchester, Rockland and Ulster counties, the rate is 1.05%.) For a complete list of all county tax rates, click here.
2. Principal Unpaid Balance On Existing Loan- In other words, the amount on the mortgage being paid off. You don't need an exact amount in order to estimate your savings. A rough amount will do. In our examples, we refer to the principal unpaid balance as the "PUB."
3. Fees Borrower Will Incur In Obtaining The Assignment- The borrower's payoff bank will charge a fee for providing an assignment, which is required for a CEMA. Normally, this fee is less than $1,000.00. However some banks will not agree to provide an assignment under any circumstances, in which case the borrowers will not be able to do a CEMA.
Question: Can you give me a formula for calculating the tax savings with a CEMA loan?
Answer: There are two ways to do the math. The first method involves a four-step process. The second method is only two steps. Both will give the same result.
1. Net CEMA Savings in 4 Steps
Step 1: Calculate what the mortgage tax will be without a CEMA:
Mortgage tax = New loan amount times the tax rate (e.g. $150,000.00 x 1.05% = $1,575.00)
Step 2: Figure mortgage tax with CEMA:
Mortgage tax = New loan amount minus principal unpaid balance of old loan times the mort tax rate (e.g. 150,000.00 - 147552 = 2,448.00 x 1.05% = $25.70)
Step 3: Subtract Line 2 from Line 1 and that is your gross tax savings. (e.g. 1,575.00 - 25.70 = 1549.30)
Step 4: Subtract any bank fees (each banks sets its own fee) and recording charges incurred by the CEMA and that gives you the total savings from the CEMA. (e.g. 1549.30 - 750.00 = 799.30 Saved)
2. New CEMA Savings in 2 Steps
Step 1: Take the PUB from payoff loan. Multiply that figure by the county tax rate.
Step 2: Subtract Bank and Recording Fees
This shortcut works because the purpose of a CEMA is to give borrowers a credit for mortgage taxes paid but not "used" as represented by the PUB of a mortgage at the time of payoff. Imagine that you have a borrower who wants to take a loan for $250,000. Imagine further that the borrower's prior mortgage was recorded in the amount of $200,000 and that they paid the full tax on that mortgage. Now imagine that at the time they refinance, there is exactly 192,153.35 left on the mortgage as the PUB. A CEMA loan allows the borrowers to take an exemption in the amount of 192,153.35. So that's why the shortcut works, because the more direct way to derive the tax savings is with the PUB, which is sometimes referred to as the "old money."
Question: How does the process work exactly?
Answer: The mortgage tax is assessed at the time a mortgage is recorded. In most refinance transactions, the existing loan is paid in full. When the old lender receives the money, they normally provide a satisfaction of mortgage. This sometimes called a "discharge" of mortgage or release of mortgage. In New York, if you satisfy a loan upon payoff and record a new mortgage instrument, you will incur the mortgage tax on the full amount of the new instrument. However, if the existing lender is willing to provide an "assignment" of the existing mortgage, then you don't need to record a new mortgage. You only need to record a mortgage for the difference between the loan amount and the PUB. So if the loan amount is $300,000.00 and the PUB on the payoff is $274,535.50, then you will only need to record (and pay tax on) a gap mortgage in the amount on 25,464.50. So while the tax on this mortgage in Queens County would have been $5400.00 ($300,000 x 1.8 %), with a CEMA, the tax is only $458.36 (25,464.50 x 1.8%). The savings can be quite substantial.
Question: Why does the process require extra time?
Answer: When the payoff bank receives an assignment request, they retrieve the borrowers servicing file which contains the original signed mortgage and note. Once they locate these documents, they send them to a local NY attorney of their choosing. At closing, that attorney comes to their office IN PERSON to pick up the payoff check and to drop off the following documents:
1. Original Assignment from the payoff bank to the new lender, which is to be recorded.
2. The Original Note, which will contain an Endorsement to the new lender.
3. The Original Mortgage
(Sometimes the payoff bank cannot locate the original note and/or mortgage. In that case, most new lenders will agree to accept a lost note affidavit and/or a certified copy of the original mortgage.)
Question: When should I start the process?
Answer: EARLY! Try to order your CEMA when the appraisal is ordered.
Question: How should I start the process?
Answer: contact us.
Question: What is old money and new money?
Answer: The "old money" is the PUB on the existing loan. The "new money" is the difference between the PUB and the new loan amount. This is sometimes called the "gap" amount.
The "old money" is secured by the existing mortgage which gets assigned to the new lender. The "new money" is secured by the gap mortgage which is recorded after the closing. Both mortgages are then combined (consolidated) to form a single lien through the CEMA.
Question: The Words "Consolidation Extension and Modification" refer to what exactly?
Answer: These three words are defined as follows:
Consolidation refers to the fact that two separate mortgages (Gap and Existing) are being Consolidated to form a single lien;
Extension refers to the fact that the existing note (which probably has less than 30 years remaining) will be extended to match the term of the new loan.
Modification refers to the fact that the terms of the old note and mortgage (the interest rate, e.g.) are being modified according to the terms of the new loan.
Question: What if the PUB is greater than new loan amount? Can I still do a CEMA?
Answer: Yes. If the PUB is greater than the new loan amount, the borrower will probably be bringing money to the closing table. In this case, there will be no gap note and no gap mortgage. There will be no mortgage tax due at all. This is called a "straight mod" or and "EMA" since there is no consolidation occurring due to the fact that there is only one mortgage, rather than the normal two.
Question: What is the lender's quarter point?
Answer: In addition to the borrower's mortgage taxes listed above, the bank is taxed .25 percent on any mortgage. The bank pays it through the title company. You may see it on a title bill, but it does not affect the borrower.
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