CEMA: Healthy ReFis for Good Borrowers

Even before the Discount Rate was hiked, I had been exploring ways to take advantage of the current ultra low rates. Mortgages are under five and half percent, and are likely to rise once the Fed QE and MBS purchase programs end. We should be expecting modestly higher rates sooner rather than later, perhaps by the second half of the year.

There are lots of modification programs for those people who bought more house than they could afford and are now delinquent on their mortgages. What about those of us who made prudent purchases and actually are paying our mortgages on time?

Despite generally tight credit conditions, there are some ways you as a homeowner can use the current rate environment to your advantage. For homeowners who are current and have a good payment history, there are specific cost-effective ways to lower your monthly mortgage payments. Whether it makes economic sense to do so depends upon how long you plan on staying in that house — and the state you live in.

A comparison of closing costs by state can be found online (here and here). I live in New York State, which has the most expensive closing costs in the country, closely followed by Texas, Florida, Oklahoma, New Mexico, New Jersey, Pennsylvania, Alaska, Colorado and California.

Consider a hypothetical NY ReFi with a prime, non-jumbo mortgage. The biggest costs are going to fall into 3 categories:

1) Mortgage Recording Tax (varies by county) (0.8-1.925%)
2) Title Insurance
3) Property Tax & Escrows

Let’s assume a $417k conforming mortgage. Shop around for rates, and you can find major banks offering ~5.25%.

The factor that determines if a Refi makes sense are typically the Recording Tax (~$3350 -$4900) and the Title insurance ($3000-$5000). If a homeowner can save $300-$500 per payment by doing a ReFi, they can eventually recoup the costs after about 2 years (based upon the numbers above).

However, New York State has recognized what a burden these taxes are to those who want to a basic ReFi. The State has created what are known as CEMAs — Consolidation, Extension and Modification Agreements.

CEMAs are a form of mortgage refinance that you can only do with your existing lender. They have one very specific advantage: They do not require a new mortgage recording tax — that is the biggest chunk of taxes paid at closing. Further, CEMAs do not require a full title search and reinsurance — rather, just a search since the property was originally purchased by the refinancer. This represents another substantial savings at closing.

The last factors are the Property Tax & Escrows. These can amount to a substantial sums of money, but they are not fees. They are taxes that would have to be paid regardless of whether you do a ReFi or not — so they do not count towards total closing costs when determining if a ReFi is economically worth it.

Given that I live in the highest closing cost state in the nation, the CEMA rules work for a ReFi for me. Without the massive closing costs, the math of a ReFi via CEMA changes dramatically. I come out ahead after just 6 months. To determine if a form of CEMA ReFi with your own bank is worthwhile, you will need to know what the taxes and rules are. You can verify the closing costs with an real estate attorney.

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See also:
New York State Taxes
Judicial Title Insurance Agency
http://judicialtitle.com/recbook.php

State-by-state closing costs
By Bankrate.com
http://realestate.msn.com/article.aspx?cp-documentid=13107766

State-by-state costs
http://www.bankrate.com/brm/news/mortgages/2008/closing_costs_map_a1.asp