What is a CEMA loan, and when does it make sense to get one?
A consolidation extension and modification agreement, or CEMA, is a loan only available to New Yorkers.
Why do owners and buyers use a CEMA?
It’s a maneuver—called a mortgage assignment—that can help you avoid paying the full mortgage recording tax on a home loan. It involves assigning a mortgage from one lender to another so your tax is only calculated on the unpaid principal. The savings can be considerable.
"If you pay off one mortgage and take out another, you have to pay the tax on the face amount of each mortgage. When refinancing with a CEMA loan, you take the existing mortgage, consolidate it with the new one, and pay the tax on the gap between the two," says Miguel Lopez, an attorney who works with National Cooperative Bank (a Brick Underground sponsor).
Mortgage recording tax is only paid on real property, like a condo or townhouse so co-op owners have no need for a CEMA. This type of loan is therefore unavailable to co-op buyers.
The other type of CEMA, a purchase CEMA, or "splitter," involves consolidating two or more loans into one as part of a sale. If you are selling a place but are still paying off your mortgage, you can transfer it to a buyer who needs financing. In a situation like this, the buyer will only have to pay the mortgage recording tax on the new mortgage amount, minus the remaining loan balance being taken on from the seller. As a seller you save money on your transfer taxes, paying taxes on the sales price of the home, minus the remaining mortgage debt that is being transferred to the buyer.
A purchase CEMA, or mortgage assignment, is different from a mortgage assumption. An assignment allows you to take on someone else's mortgage but negotiate your own rate and terms, and a mortgage assumption is where you take on a mortgage exactly as it was for the original borrower, with the same rate and terms. Purchase CEMAs may become more common in the future as interest rates start to climb. You can read more here
It is our team’s goal to keep our buyers and seller’s informed of all options. As the market transitions, the ability to do a CEMA on a condo sale could add value to both buyers and sellers by reducing their closing costs. Reach out with any questions.