What Is a CEMA Mortgage?

CEMA stands for Consolidation Extension and Modification Agreement, and it's a strategy for setting up a new mortgage to reduce tax in the state of New York. Generally, when you're buying or refinancing a house or condominium in New York, you need to pay state and local tax on the amount of the mortgage. With a CEMA loan, you're only paying tax on the difference between your mortgage amount and a previous loan amount.

Generally, when you take out a mortgage in New York, you're required to pay a tax on the amount of that loan. Tax rates vary from county to county. In Yates County and some other rural areas, it's 0.5 percent of the mortgage value. In the five boroughs of New York City, it's 1.8 percent of the first $500,000 of the mortgage value, with a higher rate on any remaining value depending on the building type. Other counties have rates that are in between those extremes.

Regardless of the actual rate, those taxes can add up on large mortgages. One way to reduce your tax liability if you are buying a building with an existing mortgage taken out by the seller or if you already have an existing loan you're refinancing is to use what's called a CEMA loan, which essentially enables you to combine the two mortgages into one. In that case, you'll only pay mortgage tax on the difference between the two mortgages plus any closing costs.

For example, if you have a $200,000 mortgage and are refinancing with a $300,000 loan and live in New York City, you would ordinarily have to pay a tax of $300,000 x 1.8 percent, or $5,400. With a CEMA loan, you would only pay the 1.8 percent tax on the difference of $100,000, meaning a tax of just $1,800. In practice, you'd likely have to pay a bit more due to tax on loan closing costs.

To arrange a CEMA loan, you need to work with your lender and potentially a lawyer to make sure the new loan meets the legal requirements. If it does, you can sometimes see substantial tax savings.

You can generally only take out a CEMA loan by working with your lender to make sure the loan meets New York's legal requirements. If you're refinancing a loan from one lender with a loan from another lender, the two will have to work together to essentially transfer the old mortgage to the new lender and merge the two. One or both may charge you transaction fees or legal fees to make this work.

Similarly, if you're buying a home through a CEMA arrangement in what's sometimes called a purchase CEMA, the seller's mortgage lender and yours must similarly work together, and one or both sides may want to have their own lawyers look at the deal to make sure the transaction properly absolves the seller of loan liability and transfers it to the buyer in a way that will satisfy the state.

In some cases, it may take longer to prepare a CEMA loan since there's more paperwork involved to make sure the loan meets the legal standards. This may not be acceptable if either side is trying to close the deal quickly. Similarly, the added transaction and legal costs may make a CEMA loan less worthwhile.

CEMA loans generally only apply to the purchase of real estate in New York, including condos. Co-op apartments, which are common in New York City, usually work under separate rules, and CEMA loans typically don't apply.