Purchasing a new home can be a very costly venture for a purchaser. The costs involve more than just the price of the property. Purchasers will face a string of settlement costs especially when a loan is involved. These loan costs include everything from loan origination fees to appraisal charges to credit report costs to lender legal fees. Each year closing costs continue to rise because lenders are required to comply with the ever-changing mortgage regulations and stricter lending requirements.
In New York State, whenever you obtain a mortgage, state and local governments enforce a mortgage recording tax to document the loan transaction. This fee is separate from mortgage interest, appraisal fees, processing fees and escrows for property taxes. Since mortgage tax is state-imposed, the tax must be paid to the government when you register or record a mortgage. Needless to say, New York City (the five boroughs) charges the largest mortgage recording tax in the country but the tax can be considerably less outside of the city.
Mortgage Tax Rates in NYC
In New York City, the applicable rate for mortgage tax varies depending upon the type of real property and the amount borrowed. A mortgage on a one to three family dwelling, or on an individual residential condominium apartment securing less than $500,000 is taxed at a rate of $2.05 for each $100.00 of the principal amount borrowed. A mortgage on a one to three family dwelling, or on an individual residential condominium apartment securing $500,000 or more is taxed at a rate of $2.175 for each $100.00 of the principal amount borrowed. If the property is a commercial property (other than a 1-3 family dwelling or individual condominium unit), the rate is $2.80 for each $100.00 of the amount borrowed.
As a note, there is currently no mortgage recording tax imposed in New York when a purchaser secures a co-op loan. New York does not treat a co-op apartment as real property and accordingly does not impose a mortgage tax.
If the property is a one-, two- or three-family home, the law requires the lender to contribute toward the payment of the tax. The lender will contribute .25% of the mortgage tax. In a nut shell, for residential condominiums and 1-3 family homes, when the mortgage is less than $500,000, the borrower’s portion of the mortgage tax is 1.80% of the loan amount. When the mortgage is $500,000 or more, the tax is 1.925% of the loan amount.
As a note, if a mortgage is recorded against two adjoining condominium apartments that have not been legally combined, the taxing authorities will impose the commercial rate of mortgage tax on the loan.
So what can a borrower or purchaser do to avoid or lessen the mortgage recording tax? There are two alternatives:
Refinance Mortgage Tax Savings
For borrowers in New York who are refinancing their mortgage, the mortgage tax may be reduced if the original lender and the new lender cooperate. The process is called a Consolidation Extension and Modification Agreement (CEMA). Yet while CEMA is common in the commercial real estate community, it’s still largely unknown by many in residential real estate.
The NYS mortgage tax can be greatly reduced or waived if the existing lender (Bank A) agrees to “assign” its mortgage to the new lender (Bank B) and the new lender agrees to a CEMA. The NYS mortgage tax would then only be due and payable on the “new money.” This process can be greatly streamlined if the borrower refinances with the same lender – usually the same lender will automatically cooperate to complete a CEMA. The CEMA approach enables you as a borrower to lessen the mortgage recording tax paid in association with the refinance. As a borrower, you have previously paid the required tax on the outstanding mortgage balance; therefore, CEMA allows you to avoid paying tax again on the outstanding mortgage amount.
Refinance Example 1:
Let’s take a look at how CEMA might work if you decided to refinance your loan into a higher balance mortgage and you have an existing unpaid principal balance on your mortgage. The borrower took out a $400,000 mortgage with Bank A in 2012 and the outstanding balance in 2016 is $380,000. The borrower wants to refinance its mortgage with a lower interest rate with Bank B. The borrower takes out a loan of $390,000 which includes paying off the old mortgage with Bank A and covers his closing costs for the new mortgage with Bank B. Provided the new lender (Bank B) and old lender (Bank A) agree, the old lender (Bank A) can assign the mortgage to the new lender (Bank B) and Bank B would consolidate the two mortgages to derive a new single mortgage with new terms in the amount of $390,000. The difference between the new loan ($390,000) and the outstanding principal balance of the old loan ($380,000) is $10,000 (the new money) and the NYS mortgage recording tax (1.80% if under $500,000) would only be imposed on the new money of $10,000.
Without CEMA, mortgage recording taxes would be:
$390,000 x 1.8% = $7,020
With CEMA, mortgage recording taxes would be:
$10,000 x 1.8% =$180 plus any CEMA fees imposed by the lender (see below regarding additional fees)
Refinance Example 2:
The borrower took out a $400,000 mortgage with Bank A in 2012 and the outstanding balance in 2016 is $380,000. The borrower wants to refinance its mortgage with a lower interest rate with Bank B. The borrower takes out a loan of $360,000 and the borrower will make up the difference of $20,000 with his own funds. Provided the new lender (Bank B) and old lender (Bank A) agree, the old lender (Bank A) can assign the mortgage to the new lender (Bank B) There is no new money on this transaction and according, no NYS mortgage recording tax would be due.
Purchaser Mortgage Tax Savings
CEMA, which most major lenders offer commonly for refinances and is a specialty concept for purchases, allows buyers the ability to assign the old mortgage and consolidate and amend it with a new mortgage for refinances and in some cases purchases. Using this strategy, buyers pay the tax on the difference between the seller’s current balance of the outstanding mortgage (old mortgage) and the purchaser’s new mortgage. Comparatively, buyers who don’t use a CEMA strategy pay mortgage recording tax on the entire mortgage amount on their home.
For buyers in New York, the mortgage tax may be reduced if the parties and the seller’s and buyer’s banks agree.
Similar to the refinance CEMA If the seller, purchaser, instead of satisfying and paying off the old mortgage from the proceeds of the new mortgage, the borrower may be able to arrange for the original lender to assign the remaining balance on the old mortgage to the new lender and the new lender cooperate, The new lender and the owner would then sign an agreement to recast the assigned mortgage to reflect the new mortgage terms under a CEMA. Because the old mortgage is not being satisfied, but simply assigned, no new mortgage debt is created. Therefore, no recording tax would apply. The key word is “cooperation” as there is no law that requires the old or new bank to arrange for an assignment of mortgage.
Purchase Example: Typically, the borrower pays the entire mortgage recording tax. Hence, purchasing a $1,000,000 home with a 30% down payment would require the buyer to pay a mortgage recording tax of $13,475 ($700,00,000 x.1.925%). But when you employ the CEMA strategy, you can save some money. For example, the purchaser’s attorney can perform some due diligence on New York’s Automated City Register Information System (ACRIS) and find out if the seller has an unpaid mortgage. Your attorney can propose to the seller’s attorney and lender that the seller’s unpaid mortgage balance be assigned and consolidated by using a CEMA.If, for example, the Seller has an outstanding mortgage of $500,000 and the seller’s bank agrees to assign the mortgage, the mortgage recording tax will then be paid on the difference between the purchaser’s mortgage amount of 700,000 and the seller’s existing unpaid principal balance of $500,000. In this scenario, the mortgage recording tax would be $3,600 ($200,000 x 1.80%) resulting in a savings to the Purchaser in the amount of $9,875.00.
Savings To Seller When Purchasers Use a CEMA
Implementing CEMA can also help sellers. According to the New York State Law on “Continuing Lien Exclusion” (implemented on Aug. 28, 1997), the outstanding amount of a mortgage existing prior to a transfer may be excluded from the purchase price when the property being transferred is a one-to-three family house or condominium unit. In other words, the seller benefits by saving a portion of their New York State transfer tax as well. Rather than the Seller paying transfer tax on the full sale price the transfer tax is the sale price less the amount of the mortgage obtained by Buyer. The New York State transfer tax rate is currently 0.4% of the sales price of a home.
Additional fees Associated with a CEMA
There is a flip side to arranging for the savings on mortgage recording tax. There are additional fees that will be imposed to complete the consolidation transaction:
- The old lender (if different from the current one) may charge a fee to arrange for the assignment of the mortgage.
- The old may charge an attorney fee to process the request for a mortgage consolidation. This fee can range between $500 to $750 for a residential transaction and much higher on a commercial transaction.
- The borrower’s attorney may charge an additional fee to arrange and coordinate the assignment of mortgage from the old lender to the new lender (between $250 to $500).
- The new lender may charge an additional fee for the additional paperwork associated with preparation the CEMA document (between $250 to $500).
- The additional documentation will need to be recorded in the register’s or county clerk office resulting in additional recording fees (sometimes up to $500.00).
These fees can sometimes exceed $1,500.00. An initial determination must be made by the borrower if the additional above costs and delays are worth the tax savings.
You cannot deduct the amount paid for your mortgage recording tax when you file with the IRS. You can, however, add this amount to the cost basis of your property. If and when you sell, you will benefit from the added value.
In the situation where you are purchasing a condo from a new development, have your attorney speak with the new development’s project manager to determine if the sponsor (developer) will sell off a portion of their loan it used to finance the building to enable you as a purchaser to implement the CEMA strategy. Keep in mind in hot markets sponsors are less likely to offer CEMA. Sponsors are in the power position and have no incentive to negotiate on the transfer taxes.
To conclude, it is important for a borrower’s attorney to calculate the estimated mortgage taxes to determine if the CEMA methodology will help your specific situation. To use it, there must be a mortgage on both sides of the transaction: one for the purchaser and one for the seller. Thus, all cash transactions or if the seller has paid off their mortgage then a CEMA may not be implemented. Often, there are additional expenses applied such as attorney’s closing costs and lender’s processing fees. There may also be extended timelines and other factors that may differ depending on which approach you take. That’s why the CEMA approach is usually more cost effective for sellers and purchasers on high-end properties. Whether you’re considering refinancing or purchasing a new home, discuss using a CEMA approach with your lender and attorney as you begin the mortgage process, as it may save you money at the closing table.
*DISCLAIMER. Nothing herein is offered as legal advice. All information in this article is for informational purposes only. Please consult with an attorney before taking any legal actions.