How to save money on refinancing a $1 million property
“Buy and Amend”: an Alternative Refinancing Method, with Doc Stamp and Intangible Tax Savings
A significant cost in larger mortgage loans in Florida comes from documentary stamp taxes (“doc stamps”) and intangible taxes. For example, doc stamps on a $1 million loan are $3,500 ($0.35 per $100 or fraction thereof (round up) of the mortgage loan) and intangible taxes are $2,000 ($0.002 of the amount of the mortgage loan).
When a borrower obtains a loan to pay off and issue a satisfaction of mortgage on an existing loan we typically call it a refinance (“refinance”). If the new mortgage loan is with a new lender, doc stamps and intangible taxes are due on the full amount of that new loan. If the borrower refinances the mortgage loan with the same lender doc stamps, but not intangible taxes, are due on the new loan.
However, a refinancing alternative avoids doc stamps and intangible taxes.
The new lender can purchase the loan from the existing lender, with new lender taking an assignment from the original lender of the note and mortgage and other loan documents.
Provided that the borrower is the same and no new additional borrower is added to the purchased loan and the loan amount is not increased with the new lender, no doc stamps or intangible taxes are due.
Often the new lender will also want to amend the loan documents to contain the terms and provisions of that lender’s standard loan documents. This is done simultaneously with the assignment and closing with the new lender. It’s often referred to as a “buy and amend” process.
For a buy and amend process the borrower must bring the interest current through the date of the assignment. If additional funds are being loaned to the borrower by the new lender in excess of the principal balance of the existing loan as an additional advance as part of a buy and amend transaction, then doc stamps and intangible taxes will be due on the additional new monies only.
There is no legal requirement for the original lender to sell the loan to the new lender unless the original lender has previously agreed to do so.
When initially dealing with the original lender, the prospective borrower may wish to negotiate an agreement that upon the request of the borrower the original lender will sell and assign the loan and loan documents to borrower’s new lender rather than simply require a payoff and issue a satisfaction of mortgage.
This agreement could be accomplished in the loan commitment (but be aware that loan documents often state that the terms of the loan commitment are merged into or replaced by inconsistent terms in the loan documents) or by a separate instrument signed by the original lender and the borrower or possibly placed in one of the loan documents, e.g., the loan agreement.
As part of this process all or most of the loan documents will be assigned to the new lender, including the note, mortgage, security agreements and loan agreement.
The new lender and their counsel will want to review the existing documents in advance. The original lender will require that the note and loan documents be assigned “without recourse” or warranty, except the new lender will want the original lender to represent that the note and loan documents are owned by, and have not been assigned or encumbered by the original lender.
The original lender will generally require that the borrower agree to pay its attorney’s fees and costs and possibly additional lender charges related to the assignment. The borrower should consider a cap on the amount of such fees and costs in the agreement with the original lender to sell the loan.
Generally, the attorney fees and costs and original lender’s fees, if any, for which the borrower would be responsible (which would include the original lender’s, borrower’s and new lender’s attorney’s fees) to buy and amend are greater than a refinance. This is a result of adding additional elements of review of the existing loan documents, assignment and the modification of the purchased documents.
However, as the loan amount grows, the savings in doc stamps and intangible taxes reaches a point that it exceeds such additional attorney’s and original lender’s fees and costs. Once the loan reaches approximately $1 million the savings in doc stamps and intangible taxes should result in savings significant enough to go with the buy and amend process.
The main advantage to the borrower of using the buy and amend route for certain size loans is of course the savings in doc stamps and intangible taxes.
The advantage to the new lender is being placed on a level playing field with the original lender when negotiating the loan.
The advantage to the original lender is on the front end, i.e. offering the assignment of the loan option as an additional inducement to the borrower to come with the original lender. If the original lender is concerned about agreeing in advance to a purchase of the loan option because of the possibility of the borrower quickly taking the loan to a new lender, the original lender can include a prepayment charge for a reasonable period of time.
This is not intended to be a complete analysis of the subject of a buy and amend arrangement but rather is intended to give the lenders (both original and new) and the borrower the basics of this concept for consideration when marketing and shopping for larger mortgage loans. This is not intended to be legal advice for any specific situation and the reader should consult their attorney regarding their situation.