Can you refinance your jumbo loan?

Posted by  on Jan 10, 2014

In the years immediately following the financial crisis, when home values plummeted, mortgage lenders pulled back their previously easy credit and limited their loan approvals to the least-risky borrowers. Homeowners of expensive property and those who live in high-cost markets were sometimes shut out from the refinancing boom even when mortgage rates dipped because lenders view high-balance loans as riskier than smaller loans. At the same time, mortgage rates for jumbo loans were generally higher than interest rates on conforming loans, reducing the appeal of refinancing. In 2013, as the housing market strengthened, jumbo loans became easier to obtain and rates on jumbo loans lined up more closely with conforming loan rates.

Understanding loan limits

Jumbo loans are required for borrowers who need to refinance a loan with a balance above conforming loan limits for their area. While there was some discussion at the end of 2013 about reducing loan limits for mortgages guaranteed by Fannie Mae and Freddie Mac, as of January 2014, the upper limit for conforming loans is $417,000 in most markets and up to $625,500 in high-cost markets for a single family home or town home or condominium for one family. (Limits go up to $938,250 for one-family homes in Guam, Alaska, Hawaii and the U.S. Virgin Islands.)

The FHA lowered its loan limits to $625,500 in high-cost markets in 2014.

Borrowers who need a loan for more than $625,500 in an area with expensive homes (or more than $417,000 in lower cost markets) will need a jumbo loan.

Requirements for jumbo loans

Before you decide to apply for a mortgage refinance for your high-balance mortgage loan, compare current mortgage rates with the rate on your existing loan. Next, consider your reason for refinancing in the context of your other financial plans. While it's great to save money with a lower interest rate, you need to consider the cost of refinancing and how long it will take to recoup that cost before you begin truly saving money. If you refinance from one 30-year mortgage loan into another, you'll also be extending the number of years you're paying for the home and likely paying more interest in the long run.

While the requirements for borrowers vary by lender, most require home equity of at least 20 percent for a jumbo loan refinance. Your credit score should be above 700; for the lowest mortgage rates, you'll need a credit score of 740 or higher. In addition, you'll be required to demonstrate that you have significant cash reserves, at least several months of mortgage payments in the bank.

Options for jumbo loans

Many borrowers opt for a hybrid adjustable-rate mortgage (ARM) with a fixed period of seven or ten years for a jumbo loan because the savings on interest can be substantial during the initial period. Most lenders also offer 15-, 20- and 30-year fixed-rate jumbo loans. Refinancing your jumbo loan may be more of an option than in the past, particularly if your home value or your credit has improved along with the economy.


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