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CEMA: Reducing Closing Costs With An Assignment

The largest portion of title charges in a New York residential closing is the mortgage tax. The mortgage tax is based on the amount of the mortgage multiplied by the rate in the specific municipality that the property is located. If the property being mortgaged is a one or six family dwelling the lender is obligated to pay one quarter of one percent of the entire amount of mortgage tax due. Additionally, if the property is a one or two family dwelling a credit of $30.00 will be deducted from the amount due. The percentages range from 2.175 percent if the mortgage is over $500,000.00 and a one to three family dwelling or a condominium (rates are higher for other real estate) As an example a mortgage in Yonkers, N.Y. in the amount of $550,000.00 would require the payment of $8495.00 in the way of mortgage tax to the County Clerk to record that instrument. How can this costs be reduced or eliminated? The answer is a consolidation and assignment of the existing mortgage that has already been recorded and a mortgage tax has been paid by the seller of the property

A Consolidation, Modification and Extension Agreement (commonly referred as a CEMA) is when the current lender who holds the mortgage on the property currently assigns the mortgage to your lender. Your lender then modifies its terms to reflect the new interest rate and maturity date and the new loan is assumed by you. The savings is attributed to not having to record a new mortgage for the current outstanding principal balance and therefore not paying a mortgage tax on that amount. Although this is tricky and requires the assistance of a seasoned attorney it can result in many thousands of dollars in savings to you.

However there are a few requirements for CEMA to be a possibility –

  • There must be an outstanding mortgage on the property
  • The mortgage must be large enough to make a CEMA worthwhile
  • The seller must agree to cooperate
  • The seller’s bank and your bank must also cooperate

In order to cover the costs, a good rule is that the current loan balance of at least $400,000, for it to help reduce your closing costs. Between the attorneys and banks, you are looking at a few thousand dollars of expenses and a delay of a few weeks.

You should discuss a CEMA with the seller as early as possible. Ideally, you would simply include it with your offer as that avoids a second round of negotiation. While a CEMA does reduce the seller’s New York State transfer taxes, that is usually not enough and they will often want to split the mortgage recording tax savings with you. This discussion can be avoided if its presented with the offer.

You will still have to pay the mortgage tax on the amount of mortgage that you are getting above the outstanding principal balance of the seller’s mortgage but a CEMA can result in a big savings to you when purchasing New York property.