Using a “CEMA” to Save Money

One of the most challenging issues when purchasing a condo or house is keeping additional charges down.  Attorneys’ fees, closing costs, and mortgage recording taxes can pile up and result in unexpected expenses for the Purchaser.  However, there are ways to minimize mounting costs and in the following instance, there is a tool that benefits both the Purchaser and the Seller.

A Purchase CEMA (Consolidation, Extension, and Modification Agreement) is a method to lower your mortgage recording tax.  If the Seller of a home has an unpaid mortgage balance and the Purchaser intends to take out a loan that is above and beyond the Seller’s unpaid balance, the Purchaser can often obtain a Purchase CEMA.  The Purchase CEMA allows the Purchaser to pay the required mortgage tax on only the difference of amount between the Seller’s unpaid mortgage balance and the loan taken out by the Purchaser.  This difference is called “new” money.  This can reduce the Purchaser’s mortgage recording tax by several thousand dollars as opposed to paying tax on the total mortgage amount.

Here is an example: the Seller of a home has a mortgage of $350,000.00 and the Purchaser is taking out a mortgage of $450,000.00. Using a CEMA, the Purchaser will only have to pay mortgage tax on the difference between his loan amount of $450,000.00 and the Seller’s unpaid balance of $350,000.00, which is $100,000.00.  Now, instead of paying $8,070.00 in mortgage tax, the Purchaser pays only $1,770.00 (In New York City, the mortgage tax rate is 1.80% of the mortgage amount minus $25.00 of the amount of the mortgage up to $499,999.00 and 1.925% of the mortgage amount above $500,000.00).  Furthermore, the Seller will save because if he assigns his unpaid mortgage, he can save when paying the New York state transfer tax.  The Seller saves on NYS transfer tax of $4.00 per $1,000.00 of consideration on the assigned loan amount (up to $500,000.00).  This is called a continuing lien deduction.

Cooperation is key to obtaining a Purchase CEMA.  The Purchase CEMA requires the cooperation of the Seller.  Be sure to include a clause requiring the Seller’s cooperation in obtaining a Purchase CEMA in the contract of sale.  In this clause, the Purchaser is ordinarily required to cover any expenses incurred by the Seller as a result of procuring the Purchase CEMA.  Also, it is necessary to determine that the lenders are willing to accept the Purchase CEMA.  Fortunately, most major lenders are willing to participate in a Purchase CEMA including Citibank, Chase, Wells Fargo, HSBC, etc.  However, not all banks want to be bothered with the task, so make sure you find an appropriate institution.

One must always balance the costs of obtaining a Purchase CEMA vs. the money to be saved.  There are numerous costs that go into obtaining a Purchase CEMA including a fee to the original lender and fee to the new bank’s attorneys.

It is also important to note that a Purchase CEMA does not apply to co-ops as co-op loans do not get recorded because they are not mortgages on real property.  They are liens on shares of stock and the proprietary lease.

When attempting to procure a Purchase CEMA, it is invaluable to have an experienced attorney review the documents.  At David A. Kaminsky & Associates, P.C., we are happy to discuss your Purchase CEMA and any other issues that may arise in purchase and sale agreements.

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