5 key facts about refinancing a jumbo mortgage

Posted by  on Aug 14, 2012

A jumbo mortgage, also known as a nonconforming mortgage, is a loan with a balance above the maximum limits set by Fannie Mae and Freddie Mac. Those loan limits, which are set by Congress each year, actually vary according to your local housing market. In 2012, $417,000 is the maximum in many locations, but the loan limits for FHA-insured mortgage loans in high-cost areas can be as high as $729,750.

Aside from the fact that jumbo mortgage loans are larger than conforming loans, they also differ in that they cannot be sold through Fannie Mae and Freddie Mac. While jumbo loans are available from many banks, credit unions and direct lenders, many lenders do not offer them at all.

So if you want to refinance your jumbo mortgage, be prepared for some extra challenges. But because lower rates on a large mortgage can equal big savings for the borrower, those challenges may be worth it.

Two things that make jumbo loans challenging

  1. Higher interest rates. Jumbo loans carry a higher interest rate than conforming loans because their high dollar volume is considered riskier to lenders -- and that risk makes it harder for lenders to sell these loans to investors. The spread between conforming and jumbo loan interest rates varies, but it often hovers between 0.4 to 1.0 percent. Keep in mind that rates for jumbo mortgages also vary widely between lenders -- sometimes by as much as 0.5 percent -- which makes shopping for the best rate vital.

  2. Tighter qualification guidelines. While all refinance applicants are subject to both a credit approval and a property appraisal, if you're applying for a jumbo loan, you should expect to meet higher credit standards, have a lower debt-to-income ratio, and be able to prove that you have cash reserves and significant home equity. Lender qualifications vary widely as well, so take your time to shop for the right mortgage.

Three ways to make jumbo refinancing affordable

  1. Split your loan. While not all lenders offer these, some will split your home refinance into a first mortgage that fits conforming loan guidelines for your area and a second mortgage. Work with the lender to compare the interest rates on these two loans to see if this is a less costly option than a single nonconforming loan.

  2. Consider an ARM. Interest rates are often lower on a hybrid adjustable-rate mortgage during the fixed period of one, three or five years and then will adjust according to the mortgage agreement. If you are considering refinancing with an ARM, it's best to make sure you can pay off your mortgage during the fixed period. Otherwise, you'll need to carefully evaluate your payments under the worst-case scenario of the highest possible interest rate.

  3. Consider an FHA loan. In some areas, FHA loan limits are higher than the conforming loan limits set by Fannie Mae and Freddie Mac. While an FHA loan requires mortgage insurance premiums, you should compare an FHA loan with a conventional jumbo mortgage to see which scenario works best for you.

Shopping between lenders and considering all your options is even more important when refinancing a jumbo loan. Again, given the size of the loan, even the smallest change in your interest rate can result in a large change in the amount of money you'll pay over time, so it pays to do your homework.

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