Whether interest rates have dropped or you want to renegotiate the terms of your home loan, refinancing your mortgage is a big step – with even higher stakes with a jumbo loan on your hands.
In a nutshell, jumbo loans are non-conforming loans. They do not adhere to the “conforming” standards set out by Fannie Mae and Freddie Mac, alongside the annual regulations set by the Federal Housing Finance Agency (FHFA). Because jumbo loans aren’t guaranteed by these federal regulators, lenders are wholly shouldering the risk with these kinds of mortgages – this, in turn, means you’ll need to clear more hurdles to prove you’ve got the financial security to stay on top of your jumbo loan mortgage repayments.
If you’ve been chipping away at paying off your jumbo loan and want to change up your loan, here’s an in-depth look at the ins-and-outs of jumbo loan refinancing.
What are jumbo loans?
Jumbo loans are a niche kind of lending, earmarked for specific homebuyers who need help with buying an expensive property. Each year, the FHFA dictates the loan limits for conventional loans. In 2023, the maximum loan limit is $726,200, an increase of $79,000 from 2022’s $647,200, according to the FHFA.
If you’re in a “high-cost” area, in which local county median home values exceed the baseline limit, the ceiling loan increases to $1,089,300, or 150 percent of the initial limit. Alaska, Hawaii, Guam and the U.S. Virgin Islands follow special statutory provisions – wherever you are in these regions outside of continental U.S., homebuyers there can seek out conventional loans capping at $1,089,300, too.
If you’re buying a property with a price tag that exceeds these baseline limit and your new home isn’t in a high-cost area, you’ll need to secure a jumbo loan instead to get the financing that you need.
While luxury homes come to mind when you think of jumbo mortgages, with escalating home prices, some homebuyers need this type of financing to simply buy property in the likes of California, New York and D.C.
Why refinance your jumbo mortgage
Refinancing is commonplace in the U.S. In 2022, refinanced home loans totaled $2.8 trillion, according to industry data. Through refinancing borrowers saved $2,700 in mortgage payments and locking in rates that were, on average, 1.15 percent lower than their initial mortgage.
Refinancing involves overhauling your current home loan with a brand new loan, including a new interest rate, terms, and potentially even a new lender. Because of this, you’ll need to go through the application and closing process again, with your lender reviewing all the nitty-gritty financial details you had to share when you first qualified for a jumbo loan.
But refinancing comes with a silver lining, with perks that are exaggerated with jumbo loans, too. These are the most common reasons why you may decide to refinance your big-ticket mortgage:
1. To reduce your interest rate
Refinancing your jumbo mortgage to secure a lower interest rate is one of the best reasons why it’s worth changing up your loan terms, especially when it comes to jumbo loans. When you secure a lower interest rate, you’re spending less of your monthly payments on interest and applying more towards your home equity.
If your credit score has improved since you applied for your first mortgage, you could also look into refinancing.
2. To shift to a fixed interest rate
Just like with conventional loans, you can choose between a fixed or variable interest rate for your jumbo loan.
If your jumbo loan started with an adjustable rate mortgage, you may refinance to lock in a fixed interest rate instead. This move can provide you with a predictable monthly mortgage payment to budget for, which is handy when you’re already managing a jumbo mortgage.
Refinancing to lock in a guaranteed lower rate for the lifetime of your repayment period can save you thousands in the face of rising interest rates.
3. To lengthen or shorten your terms
Some homeowners may need to refinance their jumbo mortgage to draw out the repayment period. Changing from a 15-year term to a 30-year term, for example, could make monthly payments much easier to manage if you’re dealing with financial difficulties.
On the other hand, you may have a higher income or more cash flow to put towards your mortgage. In this case, homeowners may opt to refinance to shorten their terms so they’re mortgage-free faster. Shortening your terms may mean your mortgage payments go up, but you’ll pay less in interest and your lender may provide you with a lower interest rate, too.
4. To use your home equity
Whether you’ve got a jumbo mortgage or a conventional home loan, many homeowners decide to tap into their home equity to pay off debt, pay for home renovations or for other major life expenses.
In this case, a cash-out refinance replaces your existing jumbo mortgage with a new one with a larger balance, giving you an extra lump sum of cash.
Essentially, you’re turning a portion of the home equity you’ve built up over the years into a cash payout. As a rule of thumb, lenders allow homeowners to borrow up to 80 percent of their home’s market value.
Because cash-out refinancing comes with plenty of closing costs, it’s worth checking if a home equity loan or home equity line of credit is a cheaper option for your needs.
The disadvantages of jumbo loan refinancing
It’s worth noting that refinancing comes at a premium. For the average conventional mortgage, it’s about $2,375, according to 2022 data from ClosingCorp but expect inflated figures for a jumbo loan.
As a rule of thumb, you should earmark about two percent to six percent of your loan principal in closing costs for refinancing your loan, according to industry estimates.
If you won’t make up the cost of this from a lower interest rate or changed terms, it may not be a financially wise decision to proceed with an application. Bear in mind, there are limits on cash-out refinancing with jumbo loans and these will vary depending on your lender.
How to refinance your jumbo loan
You’ve gone through the jumbo loan application process before, so you’ll have a good idea of how rigorous the refinancing process will be.
For your refinancing, your lender will check your income and savings, your credit history and debt-to-income ratio, and appraise your property to determine it’s fair market value.
According to Chase, they’ll need documentation, including:
- Two years of annual tax returns, including W-2 forms
- Most recent pay stubs and other proof of income
- Past 60 days of bank statements
- Profit/loss balance sheet for self-employed borrowers
- Documentation of any other income, including commissions, bonuses and other deposits
Just like when you applied for your initial jumbo mortgage, they’ll also zero in on your:
- Debt-to-income ratio. Your debt-to-income ratio is the percentage of your gross monthly income that’s dedicated to paying off your existing debts. Lenders need to know how much of your income is tied up in paying off your car, your credit card and your line of credit, for example, and how much is left over to tend to your home loan. Ensure your ratio isn’t any higher than 36 percent to score a competitive interest rate.
- A strong credit score. We all know how critical a reliable credit history is when you’re shopping for a mortgage or any kind of loan. The stakes are even higher when you’re presenting a refinancing application on a jumbo loan. Ideally, your credit score is in the 700s, instead of the baseline requirement of 620 for conventional loans. Make sure you’re clear on why you’re refinancing your loan when making your case to lenders, too.
- Established home equity. When conventional loans, you can refinance even if you don’t have much skin in the game, but this doesn’t apply to jumbo loans. At minimum, lenders prefer that you’ve built up 20 percent equity before refinancing. This should be an easy requirement to meet because you should have had a down payment of at least 10 to 20 percent when you first applied for a jumbo loan.
- A comfortable amount of savings. Down payment and home equity aside, your lender will also expect to see cash savings of about six to 12 months of mortgage payments stowed away safely in the bank. This way, if you face job uncertainty, medical emergencies or other unforeseen expenses, you have a rainy day fund to keep your mortgage payments afloat.
Refinancing a jumbo loan comes with a fair share of paperwork, including getting your financial situation in order and your home in great shape. That’s because you’ll need to prove your income and net worth, your home’s market value and condition, and your reliability as a borrower all over again.
But it may be worth the effort, especially if you’re scoring a lower interest rate that will save you thousands of dollars over the lifetime of your mortgage. Your job is to do your due diligence to make sure it’s a good move for your bottom line – and that you’re a great candidate for better terms on your jumbo loan.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.