Refinancing your mortgage can make financial sense for many reasons. You may qualify for better loan terms that can make your monthly mortgage payments more affordable. Or you can shorten your loan term, pay your mortgage off faster and save a bundle in interest. And there’s the option to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage to better manage your housing costs.
But if you have a jumbo loan, you may wonder how the refinance process works. It’s similar to that of a traditional mortgage, but there are key differences to be aware of before moving forward.
What is a Jumbo Mortgage Loan Refinance?
Before diving into the specifics of jumbo mortgage refinances, it’s vital to understand what this actually means. In short, it involves swapping out your current loan with a new one, typically with different terms.
It varies from a traditional refinance because this option is specifically for jumbo mortgages. These are home loans that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). For 2024, the limit on single home purchases in most markets is $766,550. (It’s capped at $1,149,825 in high-cost areas).
Why Consider Refinancing a Jumbo Loan?
The primary draw of a refinance for most homeowners is the possibility of more affordable monthly mortgage payments. You can also opt for a shorter loan term to pay your mortgage off faster or convert to a fixed-rate mortgage from an ARM. More on these perks shortly.
Who Is Eligible for a Jumbo Loan Refinance?
Lenders assess several factors to determine your eligibility for a jumbo loan refinance. Here are some general guidelines to be aware of:
- Credit score: Aim for a credit score of at least 660. You could qualify with a slightly lower score, but a strong credit rating helps boost your approval odds and chances of qualifying for a jumbo loan refinance with competitive terms.
- Debt-to-income (DTI) ratio: Most lenders prefer a DTI of no more than 43%. This figure represents the percentage of monthly debt payments in relation to monthly gross income.
- Loan-to-value (LTV) ratio: This figure should not exceed 80%. Simply put, the amount you owe should be less than 80% of your home’s appraised value.
- Cash reserves: They give the lender reassurance that you can make timely monthly mortgage payments if you hit a rough financial patch. Try to have at least three to six months of reserves in your account before applying for a refinance.
- Loan limit: To qualify for a jumbo loan refinance, the new loan amount must exceed the conforming loan limit threshold.
Remember, each lender has specific eligibility requirements you must meet to qualify for a refinance. Inquire before applying to learn more.
Is It Difficult to Refinance a Jumbo Loan?
You could find it a bit more challenging to refinance a jumbo loan as the credit guidelines are tighter. And you’ll also likely need an ample amount of cash reserves, as previously mentioned. But by preparing your finances and working towards a strong credit score, it’s possible to move forward and find a good deal on a new mortgage.
What are Your Options for a Jumbo Mortgage Loan Refinance?
There are four primary options to consider.
Rate and term Refinance
It lets you snag a new interest rate, loan term or both. A lower interest rate could mean lower monthly mortgage payments and sizable cost savings if you choose not to reset the loan term. If you choose an extended loan term, you could lower your monthly payments, but it could cost you more interest over the life of the loan.
There’s also the opportunity to shorten your loan term to pay your loan off faster. Reduced borrowing costs and a homeownership much sooner are both perks. However, you want to ensure you can afford the new mortgage payments, which could be much higher since you’re paying over a short term.
Cash-out Refinance
A cash-out refinance could be ideal if you make costly home improvements or a big-ticket purchase, consolidate high-interest debt or meet other pressing financial goals. It involves swapping out your current mortgage for a new one at a higher amount to account for the home equity you pull out.
Most lenders let you borrow up to 70 or 80%, and you’re free to use the cash however you see fit. You will typically get different loan terms as well and expect higher monthly mortgage payments.
Conventional Refinance
You may qualify for a conventional refinance if you’ve paid down a significant amount of your mortgage balance. Remember, it must be below the conforming loan limit of $766,550. The ability to qualify, though, means you’ll have more flexibility with lenders and the options available to you.
ARM Refinance
Although most homeowners choose to switch from an ARM to a fixed-rate mortgage, some choose to do the opposite. The primary benefit of doing so is the ability to maximize interest savings if you plan to move soon.
Be mindful that this approach could be costly if your plans are derailed and you must stay in your home for an extended period.
How Much Does It Cost to Refinance a Jumbo Mortgage?
As with most mortgage refinances, closing costs must be considered. They are usually between 2% and 6% of the loan amount, depending on the lender, loan amount, loan size and other factors. You can shop around before settling with a lender to find the most cost-efficient option.
Also, some lenders offer no-closing-cost refinances and charge you a higher interest rate instead. Or you can roll them into your mortgage to hold on to more cash.
How Does the Interest Rate Compare to a Conventional Loan Refinance?
Several factors go into the interest rate you receive on a jumbo mortgage loan refinance. Creditworthiness is important, as it signals to lenders your ability to responsibly manage the loan. In most instances, the rates on jumbo loan refinances exceed those of conventional loan refinances since these loans are riskier for lenders.
The Advantages of a Jumbo Loan Refinance
- Reduced borrowing costs: Refinancing can lead to a reduced interest rate, potentially saving you several thousands of dollars over the life of the loan.
- Lower monthly payments: Lower interest rates can reduce monthly mortgage payments and free up funds to meet other pressing financial goals.
- Loan term flexibility: Refinancing allows you to adjust your loan term, either shortening it to pay off the loan faster or extending it to lower monthly payments.
- Switch from an ARM to a fixed-rate mortgage: You can convert from an adjustable-rate mortgage to a fixed-rate mortgage to get predictable monthly mortgage payments.
The Disadvantages of a Jumbo Loan Refinance
- Higher interest rates: Jumbo loans often have higher interest rates compared to conventional loans, as they do not conform to Fannie Mae and Freddie Mac standards.
- Closing costs: Refinancing comes with closing costs that typically range from 2% to 6% of the total loan amount, resulting in higher out-of-pocket expenses or an increased loan balance if you opt to roll them in.
- Complexity: The refinance process is more lengthy and complex due to the added risk to lenders and what it involves. More paperwork and scrutiny compared to conventional mortgage refinances.
Understanding the Jumbo Loan Refinance Process
Steps in Jumbo Loan Refinance
When you’re ready to apply, here’s how to move forward:
- Step 1: Identify your goals for refinancing.
- Step 2: Shop around to compile a list of lenders.
- Step 3: Get pre-qualified with at least three lenders on your list.
- Step 4: Compare loan quotes and formally apply with your top pick.
- Step 5: Submit the necessary documentation needed to process your application.
- Step 6: Await the results of the property appraisal and underwriter review.
- Step 7: If approved, attend closing and sign the loan documents to seal the deal.
Necessary Documentation for Jumbo Loan Refinance
Be sure to gather the following documents before applying to avoid hiccups in the processing of your loan application:
- Two most recent pay stubs
- Two most recent months of bank statements
- W-2 forms and tax returns from the past two years
- Proof of insurance and title search (if requested)
Conclusion: Weighing Your Options and Making the Final Decision
Before applying for a jumbo mortgage loan refinance, familiarize yourself with the loan options to find the best fit. It’s equally important to run the numbers to decide if moving forward makes financial sense. If so, work with the lender to promptly provide any documentation needed to simplify the process and seal the deal sooner than later.
