How To Refinance A Jumbo Loan
A jumbo loan is a high-value loan that you use to buy a home that exceeds the limits established by Fannie Mae and Freddie Mac. You can refinance a jumbo loan, but you’ll need to provide extra documentation and meet higher standards to qualify.
We’ll review the process of getting a jumbo loan refinance and go over some of the benefits of doing so. We’ll also give you some examples of how your loan might change. Finally, we’ll introduce you to a few options you can use to refinance your jumbo loan.
How Soon Can I Refinance My Jumbo Loan?
There is no specific rule that dictates how long you must wait after you get your jumbo loan before you refinance. However, lenders who issue jumbo loans often have much higher standards for borrowers. It's much more difficult to find a lender willing to refinance a jumbo loan. This is because depending on your lender, jumbo loans might not have mortgage insurance like conforming loans do. This means that lenders have to be a lot pickier about who they approve for a jumbo loan.
Here are a few qualification standards you might have to meet before you can refinance your jumbo loan.
- Credit score: Your credit score is a major factor when it comes to getting and refinancing a jumbo loan. This is a 3-digit number that represents how reliable you are as a borrower. To qualify for a jumbo loan refinance, you’ll usually need a credit score of at least 700 points. Your lender might even require you to have a score as high as 760 points if you’re refinancing an investment or rental property with your loan.
- Debt-to-income ratio: Your debt-to-income ratio tells lenders how much of your monthly income goes to recurring bills. You’re a riskier bet for lenders because you’re less likely to have an emergency fund if your DTI is high. To qualify for a jumbo loan refinance, your lender might require that you have a DTI ratio of no more than 36%. This is lower than the industry standard of 50% for conforming loans. Be sure to read our guide to DTI ratios to learn more about DTI ratios and how to calculate them.
- Cash reserves: Your lender needs to know that you have enough money coming in to cover your monthly payments. This is especially true for higher-risk jumbo loans. Your lender may ask to see your bank statements to prove that you have enough cash reserves to continue paying your loan if you fall into financial hardship. Though cash reserve requirements vary by lender, it’s not uncommon for lenders to require 18 months of reserve expenses before you qualify for a refinance.
If you have a bankruptcy or foreclosure visible on your credit report, you’ll almost always need to wait until this negative item expires before you can refinance a jumbo loan. This can take as little as 7 years for a foreclosure or as long as 10 years for a Chapter 7 bankruptcy.
Keep in mind that jumbo loan refinances can also take longer than standard refinances. This is usually due to two separate factors: higher closing costs and manual underwriting.
Closing costs are higher on jumbo loan refinances because they have higher principal balances. You can generally expect to pay 2% – 3% of your total loan value in closing costs when you refinance. For example, refinancing a $600,000 jumbo loan means that you can expect to pay $12,000 – $18,000 in cash at closing (unless you roll it into your loan and increase your principal balance).
Jumbo loans go through a manual underwriting process before approval. This means that a financial expert will take a look at your documentation and search for red flags. They will look over your bank statements, W-2s and other items personally instead of using underwriting software. If you have a serious negative item on your credit report or a lack of cash reserves, your lender will see it. This means that you might need to wait until you’ve increased your funds or until the item expires before you apply for a refinance.
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How Will Refinancing Affect My Mortgage?
Jumbo loan refinances work basically the same way as regular refinances. You can change a number of different features of your mortgage through refinancing.
Lengthen Your Loan Term
You give yourself more time to pay off your loan when you lengthen your loan term because you lower your monthly payment. However, keep in mind that you’ll end up paying more in interest over time.
Shorten Your Loan Term
You also have the option to shorten your loan term. You take on a higher monthly payment when you shorten your term. However, you’ll also own your home sooner and pay less in interest. Shortening your term can be a good idea if your income is higher than it was when you applied for your loan.
Take A Lower Interest Rate
Are interest rates lower now than they were when you bought your home? If they are, you can save money when you refinance to a lower rate. Just a fraction of a percentage difference can save you thousands of dollars on a jumbo loan, so it’s often a good idea to refinance if you can get a lower rate.
Change Your Interest Structure
A refinance can also allow you to adjust the way that you pay interest. If you currently have an adjustable rate mortgage you may want to refinance to a fixed-rate mortgage. Fixed-rate mortgages allow you to pay the same percentage in interest every month, so they keep your monthly payments more predictable.
You can also transition from a fixed-rate mortgage to an ARM with a conventional jumbo loan refinance. If you plan to pay off your home early, an ARM can give you access to lower introductory rates. This can also be beneficial if you plan to sell your property in the near future.
Take Cash Out Of Your Equity
You may want to consider a cash-out refinance if you need money to cover bills or home repairs. Cash-out refinances allow you to take money out of your home that you’ve built through equity. In exchange, you take on a higher principal value.
Let’s take a look at an example. Imagine that you have a home loan with a $300,000 principal balance and you want to pay off $50,000 of credit card debt. With a cash-out refinance, you would accept a loan with a principal balance of $350,000. In exchange, your lender would give you $50,000 in cash a few days after closing.
Cash-out refinances can be very beneficial if you have a large amount of debt you need to cover. Mortgage interest rates are significantly lower than other types of debt. This means that you can potentially save thousands of dollars when you consolidate your debt into your home loan. However, most lenders have a limit on the amount of money that you can take out of your equity – especially on a high-value jumbo loan. Most lenders require that you leave 10% – 20% of your equity in your home after you refinance. This means that if you’re still very early in your loan’s term, you may not qualify for a cash-out refinance.
You may be able to change more than one part of your loan when you refinance. For example, if interest rates are lower now and you’re shortening your term, you save even more on interest.
Keep in mind that not every lender offers jumbo loan refinancing. Lenders may not want to take the risk of a large value loan or they may limit the amount of money they’ll refinance. For example, you can refinance up to $3,000,000 in principal when you work with Rocket Mortgage®. You can also talk to a Home Loan Expert to help you decide how and where to refinance your loan based on your unique situation.
Refinancing Options Available For Jumbo Loans
Think a jumbo loan refinance might be right for you? If so, you have a few options on how to proceed.
Refinance With Your Current Lender
Working with your current lender is your best bet for getting a jumbo loan refinance. Your current lender has history with you and already understands your financial situation. A solid history of timely payments may mean they’re more willing to loosen credit and reserve standards when you refinance. Contact your current lender and ask about the jumbo loan refinance application process.
Choose A New Lender
You can apply for a refinance with a new lender if you’re unsatisfied with your current one. Research lenders in your area that offer jumbo loan refinancing and ask about their lending limits. Know your principal balance before you call so you can quickly see whether you qualify.
Submit an application for refinancing when you find a lender you want to work with. Many lenders now allow you to apply for refinancing online, but this process can vary by company.
Hold Off On Refinancing For Now
The smartest thing to do in some circumstances is wait to refinance your loan until your financial situation improves. For example, you’ll have a tough time finding a lender to service your refinance if you don’t meet credit requirements or if your debt is higher now than when you got your loan. You may also not qualify for cash-out options if you’re early in your loan’s term.
Don’t think that refinancing is right for you – but you’re still having trouble making your payments? You may want to request a loan modification. A loan modification is a direct change to the conditions of your loan made by your current lender. You can modify your loan to take a longer term or lower interest rate. However, your lender must agree to the modification. Contact your lender to find out if you qualify for a loan modification.
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Refinancing a jumbo loan is more difficult than refinancing a conforming loan but it isn’t impossible. Make sure you meet your lender’s credit, debt and reserves standards before you apply. There is no universal rule that says you must have your jumbo loan for a certain amount of time before you refinance. However, individual lenders can set their own standards when it comes to who qualifies for a refinance.
You can change your loan’s term or interest structure or take cash out of your equity with a cash-out refinance. Remember that not every lender offers a jumbo loan refinance, and might have limits on the principal balance they’ll refinance. Begin by contacting your current lender or comparing lenders in your area that offer jumbo loan refinancing if you think you qualify.
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