Mortgage Tax and Assignment of Mortgage

New York State, pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 253-a imposes an additional tax to the borrowers of lending transactions for (the privilege of) borrowing monies against real property.  How does that affect me?  Here is an example, you love a beautiful two family home in New York City (it does not matter where), you offer $500,000 and you apply for a $400,000 mortgage amount.  New York City and New York State has the right to impose a mortgage tax for monies borrowed.  So, your closing costs just when up by $7,170 ($400,000 multiplied by 1.8% minus $30.00).

These closing costs are not often anticipated by your lender (if located out-of-state) and are substantial enough that it should not be overlooked.  Some lenders do not disclose this amount properly as it varies in each county in New York State.

It should be noted that mortgage taxes cannot be collected on cooperative units because cooperative units are not real property.

How do I calculate the mortgage tax?

  1. Mortgage tax varies from county to county so determine the correct percentage applicable to your county.
  2. Multiply the percentage by the loan amount.
  3. Factor in nuances for the county that the property is located in, i.e., New York City imposes a 0.125 % tax rate for transactions over $500,000 and depending on the type of property (vacant land, 1-2 family, commercial), the tax rate changes.

For certain transactions, lenders also pay mortgage tax in the amount of 0.25%

Mortgage Tax Savings

In order to avoid having to pay mortgage tax twice, an exemption exists in accordance pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 255, which allows borrowers to pay mortgage tax on the difference between the new loan amount and the principal amount of the old loan.  This amounts to huge mortgage tax saving, which reduces your closing costs.

How does this work? To put it in more simple terms in the form of an example, JPMorgan Chase Bank (Chase) currently holds a loan with the borrower.  Borrower wants to refinance with Wells Fargo Bank, NA (Wells Fargo).  My office contacts Chase to arrange for Chase to assign its mortgage to Wells Fargo.  At the closing, Chase is paid with the funds from Wells Fargo refinance.  The mortgage is NOT satisfied of record; essentially giving the appearance that Wells Fargo bought the loan from Chase.

Additional documents will be signed at the closing to effectuate the tax savings.  For example, the difference between the existing principal balance and the new loan amount is called the “new money”.  If new money is borrowed, the borrower must sign a gap note and gap mortgage.  The new money is taxed in accordance with the tax rate applicable to your county.

REMEMBER – The new money is the only amount that is taxable.  If there is no new money, there is no mortgage tax.

An agreement is also executed between the new lender and borrower called a “Consolidation, Extension and Modification Agreement”, which consolidates the old loan with the new loan, extends the term of the loan and modifies the terms of the old loan.

Are there are any fees other than the mortgage tax?

Yes.  Due to the additional documentation that has to be signed and obtained from the old lender, your attorney or the lender’s attorney may charge for the additional services of procuring the necessary documentation.  The old lender charges processing fees, which range from $1,000.00 to in excess of $2,000.00.

 

Why not do CEMAs all the time?

There are certain instances where the costs to obtain the assignment of mortgage outweighs the savings.  Additionally, there is a time factor that is involved.  In some cases, the old lender may take a long time to locate the documentation.  In the meanwhile, rate lock fees may have expired and lenders may charge for extensions of the rate lock.

How long does the process take?

Each lender handles the process differently and has different turn-around times.  Generally, each lender says 4 to 6 weeks for processing time.  Some lenders’ processing times are better than others.

Are there any up front fees or documentation required?

Every lender is different.  Some fees are charged up front and some are charged at closing by the lender.  These fees are generally not-refundable. Additionally, some lenders require a borrower’s authorization and mortgage schedule from a title commitment to start the process.

Do all lenders assign its loans upon request?

No.  A lender has no obligation to assign its loan to your new lender at your request.  It is really a privilege and not a right to request an assignment of mortgage.    Most of the well-known lenders will assign its loans upon request.

If you are a lender, mortgage broker or borrower in a refinance or purchase transaction and are having trouble with these calculations or need assistance in procuring an assignment, feel free to contact my office.

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