In New York, homebuyers and refinancers face significant mortgage recording taxes, which can add thousands of dollars to closing costs. A CEMA loan is a specialized transaction exclusive to New York that helps reduce these taxes by consolidating an existing mortgage with a new loan.
How Does a CEMA Loan Work?
A CEMA loan involves the new lender taking an assignment of the seller’s or existing mortgage and then extending new loan money. These mortgages are consolidated and modified under one agreement. This means the borrower only pays mortgage recording tax on the difference between the existing mortgage balance and the new mortgage amount.
For example, if a homebuyer takes over a $300,000 existing mortgage and adds $200,000 more to fund the purchase, they only pay tax on the $200,000 “gap,” not the entire $500,000 loan.
Who Uses CEMA Loans?
- Homebuyers purchasing with an existing mortgage on the property: The seller’s lender and the buyer’s lender agree to consolidate loans.
- Homeowners refinancing: The new lender takes over the existing mortgage, and mortgage recording tax applies only on any additional cash borrowed (cash-out refinance).
Real Savings Example
Buying in New York City with a $600,000 mortgage where the seller owes $450,000, the mortgage tax rate is 1.925%. Without a CEMA, tax would be $11,550 taxed on the full amount. With CEMA, tax is paid only on the $150,000 gap, about $2,887, saving nearly $8,660.
Potential Downsides
- Higher fees due to complex paperwork and coordination by lenders and attorneys.
- Longer closing timelines because multiple parties must approve.
- Not all lenders participate, making it unavailable in some transactions.
Tips for a Smooth Process
- Engage experienced mortgage brokers and real estate attorneys familiar with CEMA.
- Start the process early to coordinate between all parties.
- Communicate clearly with sellers and their lenders to secure cooperation.
Since closing costs and refinancing involve various fees, understanding CEMA loans can optimize your expenses. For a broader view of related closing expenses, see Refinance Closing Costs and Estimated Closing Costs.
References
- New York State Department of Taxation and Finance, Mortgage Recording Tax: https://www.tax.ny.gov/pit/property/mortgage_recording_tax.htm
- Forbes Advisor, What Is a CEMA Loan? https://www.forbes.com/advisor/mortgages/cema-loan/
- NerdWallet, What Is a CEMA Loan? https://www.nerdwallet.com/article/mortgages/cema-loan
For official guidance on mortgage taxes, visit the IRS Mortgage Tax page.
This specialized tool is a valuable way to reduce New York mortgage taxes and should be considered when purchasing or refinancing property in the state.