A jumbo loan is more complex than a traditional mortgage. The jumbo versions have higher loan maximums and offer more flexibility when it comes to buying a home. However, some homeowners may want to refinance their jumbo loans to reduce their monthly payments, get a lower rate, or capitalize on another benefit. This guide will explore how jumbo loans work, the pros and cons of refinancing your loan, and the 5-step refinancing process.
What Exactly is a Jumbo Loan?
A jumbo loan is a financial product that lets people purchase properties that do not conform to the requirements set by Fannie Mae and Freddie Mac. These two entities issue conventional mortgages but have limits on how much you can borrow from the bank. Fannie Mae and Freddie Mac raise their limits each year, but if you want to buy a mansion, you will probably need a jumbo loan.
Why Consider Refinancing Your Jumbo Loan?
Refinancing a jumbo loan can make sense if it aligns with your financial goals. These are some of the ways a refinance can improve your financial situation.
Potential Savings On Interest Rates
If you got a jumbo loan when rates were at their highs, you may be able to get a lower interest rate if you refinance your current loan. It’s also possible to receive a more favorable interest rate if your credit score has improved since you received your first jumbo loan. Reducing your interest rate even by a small amount can help you save thousands of dollars over the loan’s duration.
Possible Reduction Of Monthly Payments
Homeowners have a few options for reducing their monthly payments through a refinance. You might get a lower rate, which will have a positive impact on your monthly payments. However, you can also extend the loan’s duration to spread your monthly payments further.
A homeowner with ten years left on their jumbo loan can refinance to a 15-year loan term to reduce their monthly payments. While this approach keeps you in debt longer and increases the amount of interest you pay over the life of the loan, you get to free up your budget in the present.
Real estate investors often don’t mind kicking their debt further down the road. Most investors value present cash flow and use the extra funds to save up for a down payment on another property.
Change Your Loan Term
Extending the loan’s duration will result in lower monthly payments. While this approach frees up space in your budget, some people want to get out of debt sooner. You can also trim your loan term to become debt-free sooner. While this approach will increase your monthly loan payments, you’ll be done with the loan sooner and pay less interest in the long run.
Modify Interest Structure
A refinance allows homeowners to choose if they want a fixed-rate mortgage or a variable-rate mortgage. Fixed-rate mortgages have the same monthly payments throughout the length of the term. On the other hand, variable-rate mortgages have fluctuating monthly payments that depend on interest rate changes.
You can use the same interest structure for your new jumbo loan, but you also have the option of using the interest structure that you aren’t using for your current jumbo loan.
Opportunity For Cash-Out Refinancing
A cash-out refinance allows you to tap into your home equity while changing the current terms of your jumbo loan. You can also extend the loan’s duration to keep the monthly payments similar to where they were before your cash-out refinance.
A cash-out refinance can come in handy when you need to make a big purchase or want to fortify your finances. These refinances can help with medical bills, vacations, a down payment on an additional property, and other high-ticket costs.
Potential Risks of Refinancing Jumbo Loans
While refinancing a jumbo loan can present numerous advantages, it’s important to keep the downsides in mind. Every homeowner should know how some refinances end up going wrong.
With any refinance, you will incur closing costs equal to a percentage of your loan’s value. You can either pay the closing costs upfront of have them added to the backend of your loan. Refinances can get expensive for large balances, but that’s not the only cost. If you extend your loan’s duration, you will stay in debt longer and pay more interest over the loan’s duration.
A shorter loan gets you out of debt sooner, but you’ll also have to make higher monthly payments if you pursue that route. Homeowners also have to consider the risk of losing their jobs or having their income drop. Lenders who provide jumbo loans typically require that you have enough cash sitting around to make at least six months of payments in the event you lose your job.
Is It Hard to Refinance Jumbo Loan?
It’s harder to refinance a jumbo loan than a conventional mortgage. Lenders have stricter requirements around your debt-to-income ratio and credit score. While you can get an FHA loan with a credit score as low as 500, that’s not possible for a jumbo loan. You’re typically going to need a 700 credit score or higher to get a jumbo loan, and even that may not be enough. Meanwhile, you can get a conventional mortgage if your FICO score is as low as 620.
How to Qualify to Refinance Jumbo Loan
You will need a credit score of at least 700, but it’s a good idea to check the lender’s requirements before submitting an application. Homeowners should also have enough cash saved up for at least six monthly loan payments. Most lenders will check your bank accounts to see if you can cover that many payments.
You can typically get a jumbo loan if you have a 43% debt-to-income ratio. This DTI ratio is the max, and having a lower ratio will increase the likelihood of qualifying for a loan.
How to Refinance a Jumbo Loan: A Step-By-Step Process
You can follow these five steps to refinance a jumbo loan.
Step 1: Preparing For Application Process
You will have to gather the necessary documents when preparing for the application process. Most lenders outline the document requirements, but these are some of the universal requirements:
- Your ID
- Proof of residence
- Proof of income
- Proof of insurance
- Statement of debt
- Statement of assets
- Credit verification
Step 2: Comparing Lenders and Loan Terms
You shouldn’t rush to work with the first lender you find. It’s also a good idea to look beyond your current lender and see if you can get better rates and terms from other loan providers.
Step 3: Submitting Application and Paperwork
After comparing lenders and having the paperwork ready to go, the next step is submitting applications. Most lenders will get back to you within a few days.
Step 4: Getting a Home Appraisal and Completing Underwriting
You will have to get your property appraised so the lender knows how much it’s worth. These expenses come from out of the homeowner’s pocket.
Step 5: Loan Closure
Once you and the lender reach an agreement, you will have to close on the loan. You will have to pay any necessary closing costs, but you have the option to put those costs in the backend of your loan.
Factors to Consider Before Refinancing a Jumbo Loan
While a refinance can offer short-term relief, it’s important to think of the long-term implications. These are some of the factors to consider before refinancing a jumbo loan.
Evaluate Your Home Equity
A higher home equity position ensures that you will get out of debt sooner. However, you may have to borrow against your equity for a big expense. It’s essential to evaluate your current home equity position and assess how a refinance will impact it. Homeowners who are applying for cash-out refinances should be careful not to incur too much debt.
Your Credit Score Check
Lenders will run hard credit checks, which will reduce your credit score by a few points. It takes a few months for a hard credit inquiry to fade away, but you shouldn’t apply for any significant loans right away. In other words, it is not a good idea to apply for a jumbo loan refinance and an auto loan in the same week.
Think About The Cost of Refinancing
Refinancing costs add up. You can end up paying 2% to 5% of the loan’s value as closing costs. The high end of the range would bring closing costs to $50,000 for a $1 million jumbo mortgage. Closing costs get more expensive if you opt for a cash-out refinance.
Keep in Mind – Prepayment Penalties
Switching from an old loan to a new loan can feel like a fresh start, but you’ll probably have to pay prepayment penalties for your current jumbo loan. This additional payment is equal to a percentage of the loan’s balance. This percentage can range from 1% to 3%. You may have to tack this cost onto the backend of your refinanced loan, in addition to any closing costs. It’s also possible to pay these costs upfront.
Is Refinancing Your Jumbo Loan Right For You?
Refinancing your jumbo loan can reduce your monthly payments, let you tap into home equity, and give you more flexibility. These nonconforming loans offer higher loan amounts than the mortgages from Fannie Mae and Freddie Mac.
However, a refinance can be expensive due to closing costs and prepayment penalties. These costs are equal to a percentage of your loan’s total balance, so they are more expensive for people with jumbo loans.
It’s also important to consider what brought you to consider a refinance. Many homeowners aspire to become debt-free and make on-time mortgage payments. However, other homeowners refinance because they are having difficulty with affording monthly payments. These homeowners may want to consider downsizing or seeking career advancement opportunities that boost their income. While picking up a side hustle can also work, it’s unlikely that being an Uber driver will make much of a difference with jumbo loan payments. Granted, some side hustles are better than others.
Real estate investors regularly use refinancing to access more capital and scale their real estate portfolios. A refinance can also be a good idea if you can secure a lower interest rate. Your current lender may have a generous prepayment penalty, which may make refinancing more feasible.
