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Refinancing a jumbo loan

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

With a jumbo loan, you’re borrowing much 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 sail through the process, follow these steps:

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The benefits of refinancing a jumbo loan

In today’s market, these are the main motivators behind a jumbo loan refinance:

  • Lowering interest rates. Interest rates are at historic lows. If your existing rate is higher than the market rate, refinancing could save you thousands of dollars per year in interest payments and free up more of your money.
  • Switching from an adjustable-rate (ARM) mortgage to a fixed-rate mortgage. If you have an ARM, and see that rates are lower, refinance to change the length and terms of your loan to suit your situation. If you can afford a shorter loan, you’ll minimize your interest payments even more.
  • Extracting home equity. With property prices on the rise, many homeowners are refinancing their jumbo loans to access the equity in their home. 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.

What to watch out for

While refinancing a jumbo loan has its benefits, be careful of these drawbacks.

  • Limits on multiple mortgages. Do you have four or more mortgaged properties? You may be ineligible for a jumbo loan refinance.
  • High reserve requirements. Lenders are risk-averse, so most will ask you 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. You can pull up bank accounts, investments and other liquid assets, and you may need to justify any large deposits in your accounts over the last 60 days.
  • Exclusions. More often than not, your retirement savings don’t count as 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’ll increase your chances of approval with the following:

  • A FICO score of 660, or 700 if you have less than 20% home equity
  • A loan-to-value ratio of 80%, or at least 20% equity in your home
  • A debt-to-income ratio of 43%, though some lenders will accept 45%
  • 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 their bank accounts

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 of dollars in interest annually, and allow you to tap into the equity of your home.

Research pays off, too. Before committing, compare mortgage lenders to make sure you’re getting the best possible rate.

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