What is a CEMA loan, and when does it make sense to get one?


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CEMA stands for Consolidation, Extension, and Modification Agreement. It is a type of loan that is only available to New Yorkers, and is often used by homeowners looking to refinance their mortgages, and in some rare cases, by homebuyers as well. 

By far the most common are CEMA loans for mortgage refinancing, which help homeowners avoid paying full mortgage taxes on a second home loan. These loans are only available to those refinancing condos, houses, and townhouses, according to Warburg Realty's explainer on the subject. That's because there is no mortgage recording tax on co-ops, as they are considered personal property rather than real estate.  

"New York state taxes every mortgage that gets recorded [except for co-ops]," says Miguel Lopez, an attorney who works with National Cooperative Bank (FYI, a Brick sponsor) in closing loans. "If you go to pay off one and take out another, you have to pay taxes on both. When refinancing with a CEMA loan, you take the existing mortgage, consolidate it with the new one, and just pay the tax on the gap between the two."

For example, if a homeowner has a principal balance of $100,000 on her mortgage, then refinances with a new lender for a mortgage of $200,000, she will only have to pay a mortgage recording tax on the $100,000 difference rather than the full $200,000. In NYC, there is a mortgage recording tax rate of 1.8 percent for mortgages under $500,000 (and 1.925 percent for those over $500,000), so with a CEMA, a person in this situation would be paying a tax of $1,800 instead of $3,600.

"We do it every time we can," says Melissa Cohn, a New York-based mortgage broker. "The mortgage recording tax in New York is expensive, and you want to do everything you can not to pay it again." 

Note, though, that a CEMA loan comes with its own expenses. Lopez says that if you refinance with your current lender, the process is much easier because there's no need to get approval for reassigning the loan. If you switch banks, however, your first lender has to approve assigning your mortgage to the new one, and for this, the fees vary. Lopez says, "If you're moving banks, you'll have to pay the assignment fee and a legal fee, because a lawyer will prepare the documents. You have to do the math and figure out if it's worth it to incur the extra expense." 

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Cohn says banks may charge anywhere from $500 to $1,000, or a percentage of the loan amount.

"It's at the discretion of the bank, so the CEMA makes sense when the cost of doing it is significantly less than the cost of paying the mortgage recording tax," she says. 

You may also run into complications if you're refinancing from one bank to another. HSBC, for instance, will not provide CEMA loans when refinancing with an outside bank, Cohn says. Another potential issue might arise if the chain of title—the sequential list of owners of a property—is broken.

"You can't ensure that the bank that holds the mortgage has retained all the copies and proper forms," she says. "Far too often we don't get them—documents get lost, and without a complete, unbroken chain, you can't do a CEMA."

The other type of CEMA, a purchase CEMA, or "splitter," involves consolidating two or more loans into one at sale. A seller who is still paying off her mortgage can transfer it to a buyer who needs to take out a mortgage. The advantage for the buyer is that he will only have to pay the mortgage recording tax on the new mortgage he is borrowing from the bank, minus the remaining loan balance he is taking on from the seller. The seller, meanwhile, saves money on her transfer taxes, paying taxes on the sales price of the home, minus her remaining mortgage debt that is being transferred to the buyer. (You can read more about purchase CEMAs here and here.) 

However, splitters are pretty unusual, Lopez says.

"It's very unlikely, because the purchaser has to not only take on the seller's current obligation, but the seller is technically still liable on that note," he says. "At some point, a bank technically could come and collect on that note. It's very rare that two banks agree to do a purchase CEMA."

Purchase CEMAs may become more common in the future if interest rates start to climb, Lopez says: "If we got to a point where there was a 12 percent rate on mortgages, and sellers had 3.75 percent rate, we could see an uprise because the difference in savings would outweigh the risk."