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Refinancing a jumbo loan

If you have strong financials and plenty of cash, you could save thousands with a refinance.

Updated

With a jumbo loan, you’re borrowing more money than the average borrower. To compensate for that risk, lenders impose a strict set of requirements on refinances. But if you can meet them, you could cut down your payments by thousands per year and unlock the equity in your home.

How to refinance a jumbo loan

Refinancing a jumbo loan involves a lot of paperwork. To maximize your savings and streamline the process, follow these steps:

1. Make sure you meet the criteria

Among other requirements, you’ll need a credit score of 660+, a debt-to-income ratio of 43% and at least 20% equity in your home. If you can’t meet all the requirements, focus on improving areas that can get you over the line.

2. Compare mortgage rates

Look for a loan with a stronger rate or shorter term. Ask questions about rates and fees, then choose a competitive lender that suits your needs.

3. Do the math

Before applying, weigh the costs of your potential new loan against your current mortgage to decide whether refinancing makes financial sense.

4. Apply for a new loan

Review the loan estimate form from your lender, which includes the loan offer and the list of fees. Start filling out the loan application.

5. Submit supporting documents

Prepare the paperwork, including pay stubs, bank statements and tax returns. Know that you may need to supply your lender with letters of explanation (LOE) clarifying anything from your employment history to bank transactions.

6. Sign the dotted line

Review, sign and return the closing disclosure form to your lender. After that, you’ll need to sign your loan documents either electronically or at the title company or closing attorney’s office.

7. Close on the loan

The lender pays off your existing home loan and registers your new one with the county.

Pros and cons of a jumbo loan refinance

There are many benefits of refinancing a jumbo loan, but also several drawbacks.

Pros

  • Lower interest rates. If your current rate is higher than the market rate, refinancing could save you thousands per year in interest and free up more of your money.
  • Switch to a more stable loan type. If you have an adjustable-rate mortgage (ARM), you might consider refinancing to a fixed-rate before your interest rate adjusts.
  • Extract home equity. If you need cash to consolidate debts or cover a large expense, like college tuition or a home renovation, you could consider a cash-out refinance. But this could drive down your equity and possibly your property’s value if the market changes.

Cons

  • Multiple-mortgage limits. Having four or more mortgaged properties may make you ineligible for a jumbo loan refinance.
  • High reserve requirements. You may need to prove that you can cover the loan’s principal, interest, taxes and insurance from six to 12 months. So if the monthly payment is $8,000, your reserve requirement for 12 months is $96,000. Your retirement savings may only count as part of your cash reserves.
  • Longer wait time after bankruptcy. With a conforming mortgage, you can typically re-enter the mortgage market two years after bankruptcy. A jumbo loan has stricter standards with a seven-year wait unless you’re willing to pay a hefty interest rate.

Jumbo loan refinance eligibility

Jumbo loans have strict eligibility requirements, and lenders often add their own overlays. To qualify for a refinance, you’ll have to show you’re in excellent financial standing.

You can increase your chances of approval with the following:

  • A FICO score of 680, or 700 if you have less than 20% home equity
  • A loan-to-value (LTV) ratio of 80%, or at least 20% equity in your home
  • A maximum debt-to-income (DTI) ratio of 36%
  • No more than four mortgaged properties
  • No bankruptcies in the last seven years
  • Proof of six to 12 months’ worth of cash reserves, such as bank accounts, investments and other liquid assets
  • Sufficient income to make your monthly payments
  • An explanation for any large sums recently deposited into bank accounts

How a jumbo loan refinance compares to other types of refinances

Jumbo loan refinances have higher loan amounts than other refinances, but similar interest rates and fees.

  • Interest rates. The rate on a jumbo loan doesn’t vary too much from conforming loan rates. For example, according to the Mortgage Bankers Association, in March 2020, the average rate for a 30-year fixed-rate jumbo loan was 3.58%, while the 30-year conforming rate was 3.47%.
  • Fees. Refinancing costs for jumbo loans are similar to other loan types. But since fees are generally a percentage of the loan amount, you may end up paying more for a jumbo loan refinance.
  • Loan limit. Jumbo loans do not conform to the national loan limit, which is $510,400 for single-family homes in most counties nationwide. Government agencies like Fannie Mae and Freddie Mac won’t back jumbo loans, making them riskier for lenders.

Bottom Line

If you want to refinance a jumbo loan, be prepared for a mountain of paperwork. It can be worth it, though; refinancing to a lower rate or shorter term can save you thousands in interest annually and allow you to tap into your home’s equity.
Before committing, compare mortgage lenders to make sure you’re getting the best possible rate.

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