In many areas throughout the United States, the cost of homes has increased in recent years. In fact, the selling prices of homes, even single-family homes, now often exceed the set conforming loan limits for conventional loans. As a result, Jumbo loans are becoming more of a common option than ever before.
The conforming loan limit varies from state to state and increases in areas with a high cost of living. In most of the country, 2023 loan limits tend to be around $715,000. Though, they can be as high as $1,073,000 in high-cost areas like California, Hawaii, Alaska, Guam, and the U.S. Virgin Islands. Anything that falls outside of the conforming loan limit for a particular state is where jumbo loans come into play.
Why consider a jumbo loan refinance?
While jumbo loans have been an excellent way for homebuyers to keep up with ever-increasing home prices, they are notoriously difficult to qualify for. This is because jumbo loans are larger loans that are risky investments for lenders since they aren't insured by Fannie Mae and Freddie Mac. As a result, qualification requirements are stricter, and borrowers must undergo a more rigorous application process than someone applying for a conventional loan.
If you are one of the many individuals that have had to take on a jumbo loan in recent years, it may be time to consider refinancing. Some common reasons many end up refinancing their jumbo loans involve lower interest rates, shortening or lengthening a loan term, getting rid of an adjustable-rate mortgage (ARM), or transitioning into a conventional loan.
You may also want to consider a cash-out refinance if you have some home improvement projects you've wanted to tackle or some high-interest credit card debt you've wanted to eliminate. You can strategically use the funds to put yourself in a better financial position in relation to debt or other big-ticket expenses like paying for college tuition or student loan debts.
Interest rates are a major motivating factor in many refinances. If rates are lower than when you first took out your jumbo loan, it might be a good idea to refinance. You can use that boost to pay less in overall interest over the loan's lifetime. Additionally, this makes it possible for you to pay more of your principal balance each month rather than interest.
For those who have recently experienced life events that have made their financial situation more tenuous, some may consider refinancing to lower their monthly payments. Some pros and cons accompany each reason, so it's best to consider all options and possibilities with the help of a mortgage expert to determine what is best for you. It is harder to find lenders who offer jumbo loans, so be sure to shop around and compare rates before deciding.
Requirements for a jumbo loan refinance
There aren't set rules that state how long you have to wait to refinance after getting your jumbo loan, but you should expect some rigid guidelines depending on your lender. If you've already been through the jumbo loan application process, be aware that the refinance process will be just as stringent.
Here's what you'll need to provide proof of:
The credit score requirement for jumbo loans is higher than for conventional loans. Your score is a significant factor for a lender to determine whether you can repay the loan. Your score will need to be at least 680. In some cases, it may need to be as high as 760 if the refinance is for an investment or rental property.
Debt-to-income ratio (DTI)
Your lender will want to know how much of your monthly income goes to monthly bills. If your DTI is higher than 45%, they may consider you less capable of having savings or an emergency fund. Try and keep it around 36%
For most jumbo loans, you will need to provide bank statements that demonstrate that you have anywhere from six months to two years' worth of mortgage payments in your savings or reserves.
Higher closing costs
Since there is a higher principal balance with a jumbo loan, the closing costs will also be higher. Be prepared to pay between 3% - 6% of the loan amount in closing costs.
Loan-to-value ratio (LTV)
The amount of your mortgage compared to the appraisal value must not exceed 80%. Your LTV ratio can help determine if you'll be required to pay for mortgage insurance.
Limits on other mortgaged properties
You are not permitted to have more than four mortgaged properties at the same time when attempting to refinance your jumbo loan.
To not experience long waiting periods to be approved for the jumbo refinance, you must not have any bankruptcies within the past seven years.
How do you refinance a jumbo loan?
Once you have decided you're ready to refinance your jumbo loan, you'll need to complete the following steps:
Assess your credit score matches the requirements
Confirm your DTI matches the requirements
Shop around for the best jumbo loan rates
Once you find one you're interested in, consult with a salary-based mortgage consultant to go over the numbers
Provide the following documentation to the lender:
Tax returns for the past two years
The last two years' worth of W-2 forms
Pay stubs from the past 30 days
Bank statements from the past 60 days
Ensure you have enough savings and liquidity. Some jumbo loan lenders require proof that you have six months to two years' worth of reserves that can easily be converted into cash.
If you have any trusts, you'll need to report that to your lender by providing trust documentation.
If you are using bonuses or commissions, you'll need to provide two years' worth of documentation and possibly profit and loss statements
Review the closing documents and close on the refinance
While the application and approval process is intensive, we make the process as simple as possible here at American Financing. We provide you with step-by-step guidance throughout the entire process and tailor every loan program to fit your specific needs and goals. We recommend that you give us a call when you're ready to start looking at your options. Our salary-based mortgage consultants are available seven days a week to answer your questions and assist you in your search. So call (800) 910-4055 today!
Most looking to refinance their jumbo loan should consider the following options before making a decision:
Get out of an ARM
If you initially took out an adjustable-rate mortgage but are nearing the end of the introductory fixed-rate period, this is a good time to move into a fixed-rate loan. This would mean having predictable monthly payments with a fixed interest rate that won't fluctuate every six months.
Refi into a conventional or conforming mortgage
If you happen to have a loan balance below the current conforming loan limits in your state, you should consider refinancing into a conforming loan. The qualification process is more straightforward with conforming loans and often comes with lower interest rates.
Shorten the loan term
If you want to shorten your loan term, you are most likely interested in paying your mortgage off sooner. Going from a 30-year mortgage to a 15-year mortgage will cause your monthly payments to increase, but you will save thousands of dollars in interest over the lifetime of your loan.
Lengthen the loan term
If you're considering extending your loan's term length, you are likely hoping to pay less each month. If you have had a change in your financial situation, you may not be able to meet the higher payments associated with a shorter term. Before moving forward with this option, be prepared to pay more in interest fees and for it to take longer to pay off your loan.
Jumbo loan refinance FAQ
Are jumbo loan refinance rates and fees different from conventional mortgage refinancing fees?
While not too much higher, jumbo loans will come with slightly higher rates and fees. This is because jumbo loans are for properties that exceed conforming loan limits and are riskier for lenders to offer. As a result, the loan comes with higher closing costs. In addition, since jumbo loans have higher principal balances, the loan requires a larger down payment.
Can I refinance out of a jumbo loan?
You can refinance into a conventional loan if conforming loan limits change, and your property no longer exceeds the loan limits. In fact, refinancing to a traditional loan will provide you with lower interest rates and are easier to be approved for.
Does a jumbo loan refinance require an appraisal?
If the loan amount is for or exceeds $1 million, lenders often require two appraisals of the property. The borrower is the one who pays for the appraisal, so keep this factor in mind, so you're not surprised with additional fees.