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You bought the house of your dreams with a jumbo loan, but it’s been a few years, and you’re wondering if you should refinance. The answer is … it depends. Knowing how and when to refinance a jumbo loan isn’t as simple as refinancing a conventional loan.
You need to consider a few things before you refinance, including a mortgage lender’s requirements, your qualifications and how refinancing might affect your mortgage.
While refinancing a jumbo loan can be a bit more complicated than refinancing a conventional loan, it’s not impossible. With the right lender and a qualifying credit and financial profile, you can refinance your jumbo loan in the right way and at the right time and start saving money on your monthly payments or shorten your loan so you can own your home sooner.
We’ll tell you everything you need to know if you’re thinking about refinancing your jumbo mortgage loan.
How To Refinance a Jumbo Loan
Jumbo loans are large loans that exceed conforming loan limits. When refinancing jumbo loans, they typically have stricter qualifying requirements than conventional loans, and their interest rates and down payment requirements are usually higher.
Like many other requirements, the maximum amount you can refinance will vary by lender, but most lenders will allow you to refinance up to 80% of your home’s value.
When you apply for a refinance, lenders will look at your:
- Credit score: Your credit score is a key factor in qualifying for any loan. Lenders typically require a credit score of at least 680. But some may require a credit score in the 700s or higher.
- Debt-to-income (DTI) ratio: If you have a lot of debt, you may not qualify for a jumbo loan refinance. Because jumbo loans are larger and usually have higher interest rates, lenders want to be sure you can afford your monthly payments. They’ll typically require a DTI of 43% or less.
- Cash reserves: Lenders will also want to know how much money you’ve saved to cover your monthly mortgage payments (and any other debts) in an emergency. A healthy cash reserve is a signal to your lender that you have enough money to make your payments in case of an emergency or changes in your finances.
- Number of mortgages: There’s a limit to the number of mortgaged properties you can own before refinancing. Most lenders generally allow homeowners to own up to four mortgaged properties, including a primary residence, a second home and investment properties.
Bankruptcy and foreclosure
Refinancing after bankruptcy or foreclosure can be tricky, but it’s not impossible. If you’ve filed for bankruptcy or foreclosure, it will likely take time – at least 7 years – before you can refinance your jumbo loan. Even then, you may need to meet additional requirements such as working with a housing counselor or attending a course on homeownership and financial management.
Bankruptcies and foreclosures can stay on your credit report for up to 10 years, so it’s important to start rebuilding your credit ASAP if you want to refinance your jumbo loan.
When you’re refinancing a jumbo loan or a conventional loan, you should expect to pay closing costs. These are the fees associated with originating and processing your loan. Your closing costs can range from 2% to 5% of the loan’s amount.
Jumbo loans tend to have higher closing costs than conventional loans because they’re larger and more complex. You may want to consider a no-closing-cost refinance if you don’t have enough cash upfront to cover your closing or you’re confident you’ll sell or refinance your home before the end of your loan term.
With a no-closing-cost refinance, you can refinance your loan without paying any upfront fees. Instead, your lender will fold all or some of your closing costs (like origination fees or underwriting fees) into your loan balance. This strategy can cost you more in the long run because you’ll pay more interest on an even bigger loan.
When To Refinance a Jumbo Loan
While you can technically refinance your jumbo loan at any time, it may be harder to find a lender compared to a conventional mortgage. Why? Lenders are typically more cautious about refinancing jumbo loans because they are more expensive, more complicated and higher risk. As a result, most jumbo loan refinancing happens with the homeowner’s original lender.
When you refinance a jumbo loan with the same lender, they’ll usually require less paperwork than they would for a new loan. And since they already know your financial situation, they may be more likely to approve your loan.
However, refinancing your jumbo loan with the same lender may not make the most money sense for you. It’s always a good idea to shop around and compare jumbo loan mortgage rates, fees and terms before deciding on anything.
Required Documents To Refinance a Jumbo Loan
When you refinance a jumbo loan, your lender will require several documents to verify your income, assets and employment. The documents include:
- 2 years of tax returns
- 2 years of W-2s or other proof of employment (such as an offer letter or employment contract)
- Proof of income if you’re self-employed or own a business
- 30 days of pay stubs
- 60 days of bank statements
- Asset statements (investment account statements, retirement account statements, etc.)
Your lender may also require a home appraisal to determine the value of your home.
How Jumbo Refinancing Can Affect Your Mortgage
You’ve reviewed your finances, collected your paperwork and shopped around for the best jumbo loan rates. But before you apply, you should consider how refinancing can affect your mortgage.
Adjusting your loan term
One of the biggest benefits of refinancing is adjusting your loan term. If you’re unhappy with your loan term, you can refinance to a shorter term and save money on interest.
You can refinance to a longer-term loan if you want to lower your monthly payments. But keep in mind that the lengthier your loan repayment is, the more you’ll pay in interest over the life of the loan.
Lowering or changing your jumbo loan interest rate
When you refinance, you can adjust your interest rate. And, if you want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage – refinancing is a good way to do it.
Keep in mind that changing your loan type can change your interest rate.
For example, your interest rate will likely increase if you refinance from an ARM to a fixed-rate mortgage. But if you refinance from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage, your interest rate will likely decrease.
Taking cash from your home’s equity
With a cash-out refinance, you can refinance your jumbo loan and get cash from the equity you have in your home. You can use that extra cash to consolidate debt, make home improvements or pay for other large expenses.
Let’s say you have a $700,000 home loan and want to take out $100,000 in cash to pay off high-interest debt. With a cash-out refinance, you may be able to refinance your loan for $800,000 and get $100,000 to use for debt payoff.
Just keep in mind that a cash-out refinance usually causes your interest rate and monthly payment to increase more than they would with a jumbo refinance. If your goal is to lower your monthly payments, a cash-out refinance may not be the best option.
It’s also important to note that there are loan limits on how much cash you can get out of your home. For example, the loan-to-value limit for a conventional cash-out refinance is 80% of your home’s value. But for a jumbo cash-out refinance, the loan limit is usually lower – around 70% – 80% of your home’s value. Also, most lenders will require at least 20% equity in your home before they approve a cash-out refinance.
Drawbacks of Refinancing a Jumbo Loan
While refinancing can offer many benefits, there are some drawbacks to consider. For one, getting a jumbo refinance can be long and challenging. And because jumbo loans are not as common as conventional loans, finding a lender who offers them can also be a challenge.
Other drawbacks of refinancing a jumbo loan include:
- Limits on cash-out refinancing
- Higher interest rates
- Higher closing costs
- Stricter eligibility requirements
If you’re considering refinancing your jumbo loan, carefully weigh the pros and cons before making a decision.
Save Time and Put Your Ducks in a Row Before Refinancing
Refinancing a jumbo loan can be a great way to save money or improve your financial situation. But like any major financial decision, you must do your homework to help ensure you’re getting the best deal you can get when you refinance your jumbo loan.
When you shop around for a lender and compare offers, you stand a much better chance of getting a good deal on your jumbo refinance.
Federal Housing Finance Agency. “CONFORMING LOAN LIMIT (CLL) VALUES.” Retrieved August 2022 from https://www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limit.aspx
Consumer Financial Protection Bureau. “HOW LONG DOES NEGATIVE INFORMATION REMAIN ON MY CREDIT REPORT?” Retrieved August 2022 from https://www.consumerfinance.gov/ask-cfpb/how-long-does-negative-information-remain-on-my-credit-report