New York State has the highest closing costs in the Nation. One of the main reasons for this is the New York State Mortgage Recording Tax. This is a fee paid by the borrower to the State and local government for the privilege of having a mortgage. It is always priced as a percentage of the mortgage amount but varies, depending on the county where the property is located. For example, a mortgage placed on a home in Nassau county would trigger a tax of 0.8% of the mortgage amount paid by the borrower and 0.25% paid by the lender. The exact same mortgage, placed on a property within the boundaries of New York City (the 5 boroughs) would have an addition 1.0% paid by the borrower to the city.

This is a substantial amount of money. The Mortgage Recording Tax can be reduced, or even eliminated, with the use of a Consolidation, Extension and Modification Agreement (CEMA). By changing the mechanics of the filing process from paying off an existing mortgage and placing a new mortgage on the property, to the purchase of the existing lien on the property, the Mortgage Recording Tax can be avoided.

The clearest way to understand this is through an example. Our borrower owns his own home and is refinancing his existing mortgage. The current balance is $300,000 and he wants a new mortgage of $400,000. When he closes on his new mortgage of $400,000, he could pay off the old mortgage, receive a Satisfaction of Mortgage from the lender and then file the Satisfaction (removing the old lien) and the $400,000 mortgage (recording the new lien) in the county clerk's office. This announces to the world that the old $300,000 mortgage is no longer valid and there currently is a $400,000 mortgage on the property. He would then pay a Mortgage Recording Tax on a $400,000 mortgage.

A less expensive approach would be to use a CEMA. In this case the old mortgage isn't satisfied, but consolidated into the new mortgage. An additional $100,000 is extended to the borrower and the terms of the old mortgage are modified to reflect the terms of the new mortgage. The recording tax is now paid on $100,000 (what's called the "new money") not the entire $400,000 reducing the tax by 75%.

There are additional legal fees, filing fees and bank costs when doing a CEMA but it's a simple calculation to weigh the additional costs to the savings in Mortgage Recording Tax. If the savings is large enough, then this approach is utilized. CEMA's do take longer to close. The process involves several steps and many people. This naturally takes time. Lenders are not required to do CEMAs. Not every lender will accommodate a borrower's request to do it. Without lender cooperation, a CEMA cannot be done.

CEMAs can also be done on purchases. In this case you are modifying the mortgage that the seller placed on the property. This will have additional fees involved; it's more complicated and will take even more time than when a CEMA is used in a refinance, specifically because it's more involved.

This brings us to today's "Personal Financial Tip." When purchasing a homen have your attorney investigate the possibility of doing a CEMA. Not only is there a possibility of saving money on the closing you may uncover something that can adversely impact your closing.

There is enough stress in purchasing a home under the best of circumstances. The last thing you need is a last minute surprise that may delay or even prevent your ability to close. In today's housing market you can't assume that the seller is selling his property for more that he owes on it. It is not uncommon today that when a seller, working with his attorney, finalizes the closing calculations, discovers he is short on funds. Working back from the agreed upon sales price and subtracting off the seller's closing costs, they may be left with a balance that is less than the outstanding liens on the property. What happens now?

They may be no issue here. The seller simply comes to closing with the money necessary to cover the shortfall. Here, there is no impact to the buyer. What happens if the seller doesn't have the money?

The seller may be planning on negotiating with one or more of the lien holders on his property. His goal will be to have them take less than what's they're owed, executing what's known as a "short sale". A lender would only consider doing this if it feels that it will recoup a larger portion of their investment through a short sale than exercising its right to foreclose. This is a time consuming negotiation. If the seller waited too long to start this process, it will delay your closing. Remember there is no financial incentive for the seller to efficiently move to a closing. He's not leaving the closing with any money. In fact, if he is living in the property that he's selling and not making his mortgage payments, he has every incentive to delay. He's currently living rent free under these circumstances. Why would he be in a hurry to move out of the house and into an apartment where he is going to be paying rent?

By having your attorney investigate the feasibility of doing a CEMA on the purchase, you not only have a potential saving in closing costs but also find out much sooner if there should be any concern about a short sale.

Without a time constraint to be concerned with, you have more options available to choose from and have less stress in your life. This will lead to better decisions.

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