CEMA Mortgage Guide
What You Should Know
- CEMA mortgage, also known as Consolidation, Extension, and Modification Agreement is a refinancing option available for residents of New York State.
- Some counties in New York state charge a tax on recording a mortgage that may range from 1.80% to 1.925% of the mortgage principal.
- Refinancing using a CEMA loan allows a borrower to partially bypass the tax on recording a mortgage.
What Is a CEMA Loan?
CEMA loan stands for Consolidation, Extension, and Modification Agreement. It is an option available for New Yorkers to refinance their loan with reduced closing costs. This reduction in refinancing costs comes from a reduced tax on recording a mortgage. New York state as well as some counties levy a tax on recording a mortgage. People living in New York City may pay from 1.80% to 1.925% of their loan amount towards mortgage recording tax. These taxes may add up to thousands of dollars, especially in high-cost areas.
CEMA Loan allows eligible borrowers to bypass paying the full amount in taxes and instead pay only for the difference between the current outstanding mortgage principal and a new loan balance. It is important to note that there are some requirements a borrower must meet before they are able to refinance their loan with CEMA. This provides an opportunity for people to refinance their properties at a better interest rate and not to worry about excessively high closing costs.
Even though a CEMA mortgage allows people to save money, it has certain fees that usually add up to $2,000 - $3,000 and are not dependent on the mortgage principal. With these benefits and costs in mind, a CEMA loan is a useful program that may help many people to refinance their mortgages, but it may not be the best option for people whose mortgage has a low outstanding balance. For example, if the refinancing balance is very small, then the closing costs may eat up most of the benefit refinance provides. Additionally, if a borrower is planning to do a cash-out refinance, then they may have to pay high taxes due to a large balance difference.
Example: When to Get a CEMA Mortgage
It does not always make sense to use a CEMA loan to refinance a mortgage because CEMA loans have fixed costs that do not depend on the refinance balance. This means that if the mortgage balance is too low, a CEMA loan may end up costing more than a regular refinance. A CEMA mortgage allows a borrower to save on taxes they pay at the time of refinancing at the cost of extra origination fees while all other costs are held equal. The following table provides two scenarios that illustrate when it makes sense to use a CEMA loan.
When It Makes Sense to Use a CEMA Loan for Refinance
| Item | Scenario 1: High Balance | Scenario 2: Low Balance |
|---|---|---|
| Outstanding Balance | $250,000 | $80,000 |
| Refinance Balance | $250,000 | $80,000 |
| Closing Costs | $7,500 | $2,400 |
| CEMA Fees | $2,500 | $2,500 |
| Taxes & Fees Without CEMA Loan | 1.85% x $250,000 = $4,625 | 1.85% x $80,000 = $1,480 |
| Taxes & Fees With CEMA Loan | 1.85% x $7,500 + $2,500 = $2,638 | 1.85% x $2,400 + $2,500 = $2,544 |
CEMA loans may also be useful for cash-out refinance. This type of refinancing would work and be taxed in a similar way regular refinance would be. The only difference between the two would be the amount of taxes paid for the CEMA loan because cash-out refinance would have a larger difference between the loan amounts, and the difference is taxable. The following table provides two cash-out refinance examples and the amount paid in taxes and fees for both scenarios.
When It Makes Sense to Use a CEMA Loan for Refinance
| Item | Scenario 1: High Balance | Scenario 2: Low Balance |
|---|---|---|
| Outstanding Balance | $250,000 | $80,000 |
| Refinance Balance | $300,000 | $130,000 |
| Closing Costs | $9,000 | $3,900 |
| CEMA Fees | $2,500 | $2,500 |
| Taxes & Fees Without CEMA Loan | 1.85% x $300,000 = $5,550 | 1.85% x $130,000 = $2,405 |
| Taxes & Fees With CEMA Loan | 1.85% x $59,000 + $2,500 = $3,592 | 1.85% x $53,900 + $2,500 = $3,497 |
How to Get a CEMA Loan?
The process of using a CEMA mortgage for refinancing is not very complicated, but it requires completing certain steps that a conventional refinance does not need. A borrower should also consider whether they need to get a CEMA loan before choosing to proceed with this type of refinancing. The following list provides step-by-step guidance on how to refinance using a CEMA loan.
- Consider Your Options
Before choosing to get a CEMA mortgage, you should look into other options available for refinancing in your area. Depending on how much your property is worth, your outstanding loan balance, and other factors such as your income and the purpose for refinancing, other refinance programs may be more beneficial.
- Go Over Qualification Requirements
There are certain requirements a borrower must meet to qualify for a CEMA loan. The most important requirement that applies to CEMA loan borrowers is that the original loan as well as the underlying property must be located in New York. It is also important that the original and new lenders approve of refinancing using CEMA. It is important to note that it is possible to purchase a property using CEMA although it rarely makes financial sense to do so. Lastly, only conventional loans and FHA loans can be refinanced into a CEMA mortgage. VA and USDA loans cannot be refinanced into a CEMA loan.
- Find a Lender
It might be difficult to find a lender who offers CEMA loans, so it might take time. Even though it might take time to find the lender, you should consider multiple lenders to accept the best offer possible.
- Request a CEMA Loan
When you find an appropriate lender for a CEMA loan, you can request a CEMA loan from that lender. Depending on whether you are buying a property or refinancing, you may need to gather proof that the original lender or a seller of a property agrees for you to finance the activity using CEMA. When the loan is requested, the lender will provide all necessary information on how to close the loan.
Pros and Cons of a CEMA Loan
CEMA loan allows a borrower to save thousands of dollars in taxes when buying or refinancing a property, but it may not work for everyone. There are restrictions and costs associated with the CEMA loan. It is important to consider both the advantages and disadvantages of a CEMA loan before choosing to get it.
Summary of Pros and Cons of CEMA Loans
| Advantages | Disadvantages |
|---|---|
| Reduced Tax Obligations | Restricted to New York State |
| Reduced Cost of Refinance in Some Cases | CEMA Fees Apply |
| Long Closing Time |
Advantages
Reduced Tax Obligations: A borrower has to pay 1.85% of a loan amount in taxes to refinance a mortgage. CEMA loans allow the borrower to refinance their mortgage and pay taxes only on the difference between the two mortgage balances.
Reduced Cost of Refinance: If the borrower has a large enough mortgage, the saved tax expense may outweigh the cost of getting the CEMA loan. In that case, the borrower may save a considerable amount of money at the time of closing on a refinance, which will lead to a lower cost of refinancing.
Disadvantages
Geographic Restrictions: To be eligible for the loan, the property as well as the current loan must be in New York State. If the borrower has a loan or a property in another state, they may not be able to refinance their loan using a CEMA loan.
Extra CEMA Fees Apply: CEMA loans have their own fees that usually range from $2,000 to $3,000. These fees are not dependent on the loan amount, which means that the borrower may lose money with CEMA refinancing if their outstanding principal is too low.
Long Closing Times: CEMA loans require more coordination on the lender’s side, which may make the closing process longer than usual. A borrower should expect to wait for 30 to 90 days to close on the CEMA loan refinance. Even though it should not be a problem for most borrowers, some people may be constrained in time.