The definition of a gap mortgage depends on where you are located. In New York, it's a special structure that allows you to use your existing mortgage even after a refinance (or sometimes a new purchase), letting you avoid paying the New York State mortgage tax. In other parts of the country, it's a loan that makes your down payment for you when your house sale gets delayed.
New York CEMA Loans
In a consolidation, extension and modification agreement loan, you carry your old debt forward with you to your new loan. Instead of having you pay off your old loan with money from your new lender, your original lender assigns your loan balance to the new one. Your obligation to the old lender ends as if you had paid it off, but you haven't created a new balance for that portion of your balance. The only "new" mortgage debt is the gap between your old mortgage balance and your new one. For instance, if you refinance a loan on which you owe $421,000 into one for $450,000, you'd have a gap mortgage for $29,000 on which you'd pay mortgage registration tax.
CEMA Loan Savings
Many counties in New York charge a very high mortgage tax. In New York City, mortgages over $500,000 carry a 1.925 percent tax, and those under that threshold are taxed at 1.8 percent. If you take out a $450,000 mortgage to refinance a $421,000 loan with some cash out, your taxes would be $8,100. However, if you use a CEMA loan, your $29,000 gap mortgage would only be subject to $522 in tax, saving you $7,578.
CEMA Loan Drawbacks
There are two drawbacks to CEMA gap loans. The first is that not every lender will grant you an assignment, so you may not be able to do one. If you're in that situation, you might be able to do a refinance with your existing lender and still get the tax-saving benefit of a gap loan. The second is that assignments aren't free. Your bank will probably charge you a sizable fee. While doing the gap loan will be a good economic deal with high loan balances in high-cost counties, if you live in a suburban area like Westchester County that only has a 1.05 percent tax and have a modest balance, the fee may work out to more than your savings.
Home Sale Gaps
If you're selling your house and buying a new one, the hope is that your old house will sell the day before your new one closes. If that doesn't happen and your purchase closes first, you will need to come up with money to cover your down payment. A gap or bridge loan is a short-term loan that makes your down payment while you're waiting to get the sale of your house completed. If you can't get a formal gap loan from a bank, you may be able to borrow money from your 401(k) as well.
- Adams Law Group LLC: New York CEMA Loans -- FAQ
- The Truth About Mortgage: Bridge Loan
- Consumer Financial Protection Bureau. "What Is a “Piggyback” Second Mortgage?" Accessed July 29, 2020.
- Federal Housing Finance Agency. "The Relationship between Second Liens, First Mortgage Outcomes, and Borrower Credit: 1996‐2010," Page 1. Accessed July 29, 2020.
- Experian. "What Credit Score Do I Need to Get a Mortgage?" Accessed July 29, 2020.
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- Texas Department of Insurance. "Private Mortgage Insurance (PMI)." Accessed July 29, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.