If you are planning to refinance your New York condo or home, ask your potential mortgage lender this question: “What is a CEMA?” Their answer will tell you whether that lender is truly tuned into the New York real estate market. It could also save you some big bucks.

CEMA stands for “Consolidation, Extension and Modification Agreement” and this is why your lender should be aware of it and how it can benefit you.

Every county in New York levies a mortgage tax on the mortgages recorded in its jurisdiction. Rates vary from county to county and among property types (i.e. single family v. two family, vacant land, or commercial property). In Nassau County for example the tax on a single family mortgage is 1.05 percent of the loan amount. In New York City the tax is 2.05% for a mortgage under $500,000 and 2.175% above that amount. On a $300,000 NYC home that is a whopping $6,150.

Many out-of-state lenders are not aware of the New York mortgage tax and others may fail to include it in their loan disclosures. Still others may estimate the amount incorrectly because of the county-by-county variability and certain nuances that can affect the tax computation. Any of these mistakes could lead to a very unpleasant surprise at the closing table. A New York-savvy lender will not only be aware of the mortgage tax but may be able to reduce the size of your obligation when you refinance.

That is where a CEMA comes in. A Condition, Extension, and Modification Agreement takes advantage of a mortgage tax loophole for refinancing. Article 11 of the New York Tax Law requires the tax on each mortgage of real property located in New York based on the amount of the debt or obligation secured. In other words, the tax is only on the new money. For example, a borrower with a $300,000 mortgage wishes to refinance into a new $350,000 loan, taking cash out for home improvements. With a straight refinance, the mortgage tax on the transaction – $350,000 of new funding – would be $7,175. However, a CEMA requests the old lender to assign his mortgage to the new one who will then modify it and consolidate it into the $350,000 loan. This results in $50,000 of new debt and a mortgage tax obligation of $1,025.

Today most borrowers are refinancing to obtain a lower interest rate rather than cashing out equity and a new loan is typically less than 5% larger than the old one; just enough to cover refinancing expenses. Using a CEMA in such cases can reduce the mortgage tax essentially to small change.

CEMAs are not a slam dunk. The original lender must be willing to allow the assignment although major lenders usually comply. The paperwork necessary to accomplish an extension and modification can take some time, sometimes six to eight weeks, but a lender based in New York (as opposed to an internet based lender who is licensed everywhere) is familiar with the vagaries of the tax, arranges CEMAs regularly and will have a process in place to do so efficiently. Plan ahead, pick a lender with experience in the process, and be a little patient. The savings will make it worth your while.