Should I refinance a jumbo loan?

Happy couple walking, hand in hand, after refinancing a jumbo loan on their house.Image: Happy couple walking, hand in hand, after refinancing a jumbo loan on their house.

In a Nutshell

Refinancing a jumbo loan may give you a better interest rate or more manageable payments. But there are costs to refinancing, and lender requirements will likely be stricter than for other mortgages.
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If you’ve taken out a jumbo loan to buy a house, you might wonder whether it’s a good idea to refinance at some point.

Refinancing means taking out a new loan and using it to pay off your mortgage. You then make monthly payments on the new loan, which might have a different interest rate or term than your previous loan.

Refinancing might give you a better interest rate or a more affordable monthly payment, or it might allow you to pay off your mortgage over a longer or shorter time frame. But there are costs to refinancing, and because these costs go up with the size of the mortgage, they can add up to a significant amount of money for a jumbo loan. We’ll help you think through the pros and cons before deciding whether to refinance a jumbo loan.

What is considered a jumbo refinance loan?

A jumbo loan is a mortgage that’s larger than the conforming loan limit set by the Federal Housing Finance Agency. Lenders can sell loans that are under this limit to Fannie Mae and Freddie Mac, which lowers their risk. Lenders don’t get this protection for jumbo loans, so borrowers usually have to meet tougher standards to qualify for a jumbo mortgage.

The conforming loan limits are updated each year and vary depending on where the home is located.

A jumbo loan refinance is the process of taking out a new loan and using it to repay a jumbo loan. If the new loan also exceeds the relevant loan limits (and is therefore a jumbo loan as well), you can expect higher closing costs and stricter requirements than you’d encounter with a typical refinance.

Before approving you for a jumbo refinance, lenders evaluate your credit scores, monthly income and assets to make sure you’re able to repay a large loan.

The costs of refinancing a jumbo loan

There are several fees you’ll likely have to pay to refinance, such as title search fees and application fees. You may have to pay for a second-opinion appraisal for a jumbo loan.

As with any refinance, if you take out a new loan with a longer term, your total interest costs for the life of the loan are likely to go up because you’ll be making more payments before the loan is paid off. Refinancing a jumbo loan may also affect your taxes. You may be allowed to deduct the interest on a typical home loan, but a jumbo loan could reach a cap on those deductions. If you need to refinance a jumbo loan, it’s best to consider speaking to a tax professional or consulting the IRS for clarification on the current year’s tax laws.

Should I refinance a jumbo loan?

Whether refinancing a jumbo loan makes sense for you depends on your circumstances. These considerations can help you decide whether to move forward with a refinance.

When you may benefit from refinancing

Refinancing may be a good idea if you can get a lower interest rate and if the savings will outweigh the costs of refinancing. You can use a refinance calculator to figure out how many years it’ll take before you make up the refinancing costs.

And if you choose a cash-out refinance, you may be able to draw on your home equity to pay for major expenses like education or health care, or to cover the costs of remodeling.

Refinancing may also allow you to change the type of mortgage you have. There are plenty of scenarios that could justify refinancing, including the need to get into a mortgage that is not a jumbo loan. If you have an adjustable-rate mortgage, you might be able to switch to a fixed rate so you don’t have to worry about payments increasing in the future. Another possibility is switching to an FHA loan, which might have lower closing costs than conventional mortgages and which may allow you to roll the costs of energy efficient upgrades into your loan.

When refinancing may not be worthwhile

It may not make sense to refinance if you don’t meet lender requirements for a jumbo loan. Lenders often want to see higher credit scores to issue a jumbo loan. And they’ll probably have other requirements, such as a debt-to-income ratio of 36% or less.

If you’re going to sell your house soon, you may not benefit from lower payments for long enough to make up for the costs of refinancing.

Also, if you took out your current mortgage many years ago, your mortgage payments are probably mostly going toward principal now. Refinancing would mean that a larger share of each payment would go toward interest and you’d build equity more slowly.

Finally, if your existing mortgage has a prepayment penalty that you’d have to pay to refinance, the penalty might outweigh any savings you’d gain from refinancing.

Alternatives to refinancing

Depending on the reason you want to refinance, there may be alternatives to consider. For example, if you want to pay off your loan faster and build equity more quickly, you can make larger monthly payments on your current mortgage and ask your lender to put the extra money toward the principal.

If you’re having trouble making your mortgage payments because of a temporary hardship, you could ask your mortgage servicer for forbearance. Forbearance allows you to stop making payments or to make smaller payments for several months. Later, you pay to cover the amount you postponed.

Keep in mind that jumbo mortgages that aren’t backed by Fannie Mae, Freddie Mac or a federal agency don’t receive the same forbearance protections as loans guaranteed by the government. But your mortgage servicer might still be willing to work with you.

If your financial circumstances have changed permanently and you won’t be able to make your current mortgage payments from now on, you could try to get your loan modified. Loan modification can lengthen the term of your loan, lower your interest rate or lower the principal you have to repay. Mortgage servicers likely won’t want to offer this option unless you’re at risk of foreclosing on your home.

If you want to refinance to take cash out of your home equity, you could think about applying for a home equity loan or a home equity line of credit. Those options also allow you to borrow against your equity.

If you don’t qualify for a jumbo refinance and you’ve decided you can’t afford to stay in your home, you could sell the home. With this option, you’d no longer need to make mortgage payments, but you’d have to find a new place to live. If your home would sell for less than the remaining mortgage balance, you should first check whether your state law requires you to make up the difference. Some lenders may agree to give you a waiver stating that you’re not responsible for the portion of the mortgage that isn’t paid off by the sale.

Next steps

If you believe refinancing a jumbo loan may be the right choice for you, you’ll want to take a look at your finances to see if you’re likely to qualify. It’s a good idea to review your recent credit reports and credit scores and gather documentation of your income and compare it to your outgoing debt.

Consider getting quotes from multiple lenders so you can compare offers and choose the best mortgage offer for you. Don’t forget to ask the lender that issued your existing mortgage about refinance options. Sometimes lenders are willing to waive certain fees if you took out a mortgage from them fairly recently.

About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such as Hcareers, Impactivate and K… Read more.