When purchasing a property in New York City (or anywhere, for that matter), buyers need to account for more than just the purchase price of their new home. On both the purchase and sale side, taxes, mortgage fees, and other closing costs can add up to significant amounts. However, there are ways to save a few dollars in some cases if you know the short cuts. One of the ways buyers and sellers often save money on mortgage and transfer taxes is called a “Purchase CEMA.”
Under certain circumstances, it’s possible to avoid or significantly reduce the usual mortgage tax in New York State by using a “CEMA” (Consolidation, Extension and Modification Agreement).
A Purchase CEMA allows the seller’s lender to assign the seller’s existing mortgage over to the buyer’s lender. Then, instead of paying mortgage tax on his full loan amount, the buyer only pays tax on the difference between his own mortgage amount and the unpaid principal balance of the seller’s existing mortgage.
Purchase CEMAs can be tricky. They can add several weeks to the closing process and there are additional lender and title fees, so your attorney should calculate the actual savings carefully to see if using a Purchase CEMA would actually work in your favor.
For a CEMA to work, you need 3 things:
- The seller must have an existing mortgage and the mortgage tax must have been paid on such mortgage
- The seller’s lender must be willing to assign the seller’s mortgage to the purchaser’s new lender.
- The purchaser’s new lender must be willing to accept the assignment of the seller’s mortgage and to permit the purchaser to close their new loan as a CEMA.
So, let’s take a look at how the numbers could work. Assuming a purchase price of $1,000,000 on a New York City condominium where the purchaser is obtaining a mortgage of $750,000.00, the mortgage tax would be $14,437.50 ($750,000 x 1.925%). If however, the purchaser participates in a Purchase CEMA and the balance on the seller’s mortgage is $500,000, then the mortgage tax will only be calculated on $250,000 ($750,000 – $500,000). Under this scenario, the purchaser would only pay $4,500 in mortgage tax ($250,000 x 1.8%). Using the Purchase CEMA process, the purchaser’s mortgage tax savings would be $9,937.50 ($14,437.50 – $4,500).
But Purchase CEMAs don’t just benefit buyers; sellers can also save. New York State imposes a transfer tax equal to .004% of the purchase price on all sales transactions, and this is usually paid by the seller. However, in a Purchase CEMA transaction, the seller only pays transfer tax on the difference between the purchase price and the amount of the unpaid principal balance of the seller’s existing mortgage. So, in the example above, the seller would save $2,000 by using the Purchase CEMA process.