Refinancing a jumbo loan: What to know

For the mortgage industry, it’s been a record-breaking year. Last year, lenders set an all-time high in refinance lending volumes at $2.8 trillion in refinances. Despite the recent slight rise in mortgage rates, now may still be a great time for a home loan refinance.

For homeowners with a jumbo loan — while the requirements for a mortgage refinance are similar — it can be more of a challenge. You’ll need to prove to a lender that you’re in a good position to refinance.

WHAT ARE THE DIFFERENT TYPES OF MORTGAGE LOANS AVAILABLE?

What is a jumbo loan?

Fannie Mae and Freddie Mac, federally backed home mortgage companies, are restricted by law to purchasing single-family mortgages with origination balances below a certain amount, known as the conforming loan limit. The conforming loan limit for 2021 is $548,250 and up to $822,375 or more in some high-cost areas. Anything above the conforming limit is known as a jumbo loan.

Jumbo loans are not backed by Fannie Mae, Freddie Mac or the federal government, which means the lender is not protected from loss if the borrower should default on the loan. Because jumbo loans are larger than the average mortgage and carry more risk, lenders have stricter requirements compared to traditional mortgage loans.

The requirements to refinance a jumbo mortgage

If you’re considering refinancing your jumbo loan to get lower loan rates, you need to meet your lender’s minimum requirements. Here is what a typical lender may require to qualify for a jumbo loan refinance:

• A minimum FICO credit score of 660 but preferably 700 or higher
• A maximum debt-to-income (DTI) ratio of 43%
• A maximum loan-to-value ratio (LTV) of 80%
• No more than four mortgage properties
• Your name on the title of your home for at least six months
• No bankruptcies within the past seven years
• Proof of cash reserves to show that you have enough saved to cover the loan’s principal, interest, taxes and insurance for at least several months

15 OF THE BEST MORTGAGE REFINANCE COMPANIES FOR 2021

Here are documents you’ll be required to provide for a jumbo loan refinance:

• Two years of tax returns
• Two years of W2 forms
• Recent paystubs
• Bank statements

If you’re self-employed, you may need to provide a profit and loss statement and a balance sheet. Don’t forget about closing costs which could be between 2% to 5% of the total loan balance; however, closing costs vary by lender.

Refinance rates over the past year

By January 2020, the average mortgage interest rate for a 30-year fixed loan had an annual percentage of about 3.7%. The Federal Reserve took action in response to COVID-19, slashing interest rates to encourage borrowing on home loans.

By the first week of January 2021, a 30-year fixed loan was at an all-time low of 2.65%. Since then, interest rates have fluctuated and started to increase in mid-February. However, rates have been dipping again recently. Rates have remained under 3% for last three consecutive weeks.

Mortgage refinance rates are still near historic lows. Here’s a look at today’s mortgage rates:

• 30-year fixed-rate mortgage refinance: 2.875%
• 20-year fixed-rate mortgage refinance: 2.75%
• 15-year fixed-rate mortgage refinance: 2.25%
• 10-year fixed-rate mortgage refinance: 2.125%

WHAT IS A GOOD INTEREST RATE ON A HOME MORTGAGE?

A normal refinance vs a jumbo loan refinance

Homeowners typically decide to refinance their home to gain the following loan options:

• Negotiate a loan with lower monthly payments or a lower interest rate
• Shorten the loan term
• Change the loan type from an adjustable-rate mortgage to a fixed-rate mortgage
• Cash-out refinance to draw out the home's equity and make home repairs, renovations or use for debt consolidation

While a normal refinance and a jumbo loan refinance are for the same purpose and have the same potential benefits, they have different requirements.

Here is what your lender may require with a normal refinance:

• A credit score of 620 or higher for conventional mortgages; however, some government programs have a minimum as low as 500
• A DTI ratio of 43% or lower
• An LTV of 80% or lower

While they’re similar, requirements vary by lender. Refinance rates for jumbo loans also don’t vary much compared to normal mortgage refinances. Make sure to shop multiple mortgage options to get the best rate. Even a slightly lower mortgage rate can make a big difference over the life of the jumbo loan.

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