Refinancing your mortgage is a big decision, especially when you’ve got a big mortgage.
If you bought your home with a jumbo loan — a mortgage that exceeds the federal government’s limits for conforming conventional loans — refinancing even with a small adjustment to the loan details can save you a lot of money.
However, refinancing isn’t cheap. Understanding how to refinance a jumbo loan is important when deciding if it’s the right financial move to make for you.
Key Takeaways:
- Without limits on how much you can borrow when refinancing, the specifics of your new jumbo loan — and its costs — are up to your lender.
- Refinancing a jumbo loan can save you money by reducing your interest rate, switching from an adjustable-rate mortgage to a fixed-rate mortgage, or changing your loan term.
- Refinancing a jumbo loan will have a big effect on your finances, so be sure to know the pros and cons before committing.
When To Refinance a Jumbo Loan
Refinancing a mortgage of any size is a major decision. But when it comes to refinancing a jumbo loan, it’s especially important to run the numbers before jumping in.
A jumbo loan is a type of mortgage that in some way fails to meet the federal government’s standards for a conforming conventional loan, usually by exceeding the conforming loan limit. That limit in 2023 for a single-family home is $726,200 in most of the United States, and $1,089,300 in high-cost markets. If you need to borrow more than that when refinancing, you’ll require a jumbo loan.
Below are some common reasons why homeowners refinance jumbo loans.
To lengthen the loan term
When you refinance, you can adjust the loan term. The most common loan terms are 30 years and 15 years. If you extend your loan term, you stretch out your payments over a longer period of time. If all else remains the same, this lowers your monthly mortgage payment and makes it more affordable.
To shorten the loan term
Some homeowners want to pay off their mortgage more quickly, and refinance to a shorter loan term. Although the monthly payment will increase, you’ll save money on overall interest and be free of your mortgage sooner.
To reduce the interest rate
When borrowing a large amount of money, as with a jumbo loan, even a small reduction in the interest rate can save you a lot of money.
“When interest rates drop significantly, it may make financial sense to refinance a jumbo loan,” says Jenna Alberta, owner of Mobile Home Buyers, based in Brooklyn, New York. “This allows homeowners to secure a lower interest rate, potentially saving them thousands of dollars over the life of the loan.”
As an example, a fixed-rate mortgage for $1.4 million with a 30-year term at a 7% interest rate will have a monthly payment of $9,314 and will cost you $1,953,125 in interest. The same loan at a 6.5% interest rate will have a monthly payment of $8,849 and total interest costs of $1,785,623 — saving you $465 a month and $167,502 in interest.
To change the interest rate type
Refinancing lets you switch between an adjustable-rate mortgage and a fixed-rate mortgage. A fixed-rate loan eliminates the risk of having to make a higher monthly payment if interest rates go up. Alternately, an ARM often comes with a lower introductory interest rate, which may save you money if you expect to sell the home before the rate is scheduled to change.
To borrow equity
Another reason to refinance a jumbo loan is to borrow some of your home equity.
Equity is the difference between what your home is worth and how much you owe on it. If your home is worth $1 million and you owe $800,000 on a jumbo loan, then your equity is $200,000.
Equity can be borrowed in a number of ways: a cash-out refinance, a home equity loan, a home equity line of credit, or a reverse mortgage.
Requirements To Refinance a Jumbo Loan
Unlike conforming conventional loans or government-backed loans, there are no established rules for jumbo loans. As such, each mortgage lender sets its own requirements, which typically are extensive. As when approving a jumbo loan to buy a home, the lender will closely vet the borrower’s finances to ensure they can afford the refinance.
Here are some common requirements that lenders have for refinancing a jumbo loan.
Minimum credit score
The exact credit score required for your jumbo loan refinance will vary by lender. However, it’s a good idea to have a credit score of at least 680.
Some lenders may require a minimum credit score of 740 when you’re refinancing to a 15-year jumbo loan.
Maximum debt-to-income ratio
Your debt-to-income ratio shows what percentage of your household income is committed to debt. It’s easy to figure out with a DTI ratio calculator, or by dividing the total of your debt payments by your total income and multiplying by 100.
For example, if you make $15,000 a month and you spend $4,500 a month on your mortgage or rent, credit cards, car payments, and student loans, then your DTI ratio would come out to 30%.
In general, you should expect jumbo loan lenders to require a DTI ratio of 45% or less.
Cash reserves
For a jumbo loan, most lenders prefer borrowers to have a significant amount of cash on hand. Typically, you’ll need enough cash to cover the mortgage payment for several months. If you lack sufficient cash reserves, it can be difficult to qualify for a jumbo loan refinance.
Cash in a savings account isn’t the only way to meet this requirement. Other options include funds in an investment account or assets owned by your small business.
Loan-to-value ratio
When you apply for a refinance, the lender will limit how much of your equity you can borrow. In many cases, you’ll be required to maintain a maximum loan-to-value ratio of 80%. That means you must keep 20% equity in your home.
Documents required
When refinancing a jumbo loan, the paperwork requirements can seem exorbitant. Be prepared to fully document your finances by providing your lender with, at minimum:
- Income tax returns for the past two years.
- All bank account statements.
- Information on any investment accounts.
- Detailed list of assets.
- Information on all debts and financial obligations.
How Will a Jumbo Loan Refinance Affect Your Mortgage?
A jumbo loan refinance can affect your mortgage in a few different ways, based on which type of loan you refinance into and its terms.
Refinancing to a new jumbo loan
When you refinance, you pay off your old mortgage using a new mortgage with new terms. The process for refinancing to a new jumbo loan is similar to what you experienced when getting your original jumbo loan.
Closing costs
Refinancing a jumbo loan will come with closing costs. In general, the closing costs will total around 3% to 6% of the loan amount.
With a jumbo loan, the larger loan amount can make the closing costs particularly burdensome. Closing costs on a $1 million loan would be expected to total between $30,000 and $60,000.
It’s important to run the numbers before you refinance to determine when your savings will recoup your closing costs. This is called the break-even point.
For example, if you refinance your jumbo loan and reduce your monthly payment by $1,000, it will take five years before your savings exceed what you paid to refinance. You likely would lose money on the refinance if you were to sell the home before reaching the break-even point.
Manual underwriting
Unlike conforming loans, jumbo loans are manually underwritten. The manual underwriting process tends to be more expensive, time-consuming, and thorough than the streamlined or automated underwriting processes used for other loan types.
Refinancing to another loan type
When refinancing, you don’t have to refinance to the same loan type. If you qualify for another loan type, you can switch things up — though it may not always make sense to do so.
Here are some of your options when refinancing a jumbo loan.
Conforming conventional loan
If you’ve paid off enough of your home loan, the amount you need to borrow to refinance might qualify for a conforming loan. With automated underwriting, refinancing to a conforming loan may be a more streamlined and less expensive option.
VA loan
If you meet the military service requirements, you may be able to refinance your jumbo loan into a Veterans Affairs-backed loan. VA loans have no maximum loan amounts and offer competitive interest rates. The home must be your primary residence, and you have to pay a one-time funding fee, so it’s important to compare the costs of a VA loan to the costs of a jumbo or conforming conventional loan.
FHA loan
If you’re attempting to refinance your jumbo loan into a new loan that’s less than the maximum loan limit for your area, a Federal Housing Administration loan may be an option. FHA loans typically are for buyers with lower credit scores and small down payments. FHA loans also require mortgage insurance that must be paid for at least 11 years. Their terms may make them a more expensive refinance option for homeowners with a lot of home equity and good credit.
USDA loan
U.S. Department of Agriculture home loans are aimed at low- and middle-income borrowers buying homes in rural areas. To refinance into a USDA loan, your income and your home would have to meet its requirements, and you would need to pay upfront and annual guarantee fees. If you used a jumbo loan to buy your home, it’s unlikely that a USDA refinance — if you qualify — would be your best option.
Pros and Cons of Refinancing a Jumbo Loan
Every financial choice has advantages and disadvantages. Here’s what to know before refinancing a jumbo loan.
Refinancing a Jumbo Loan: Pros and Cons
| Pros | Cons |
| Tap into lower interest rates: Depending on your situation, you might be able reduce your interest rate and lower your overall borrowing costs. | Stringent requirements: Lenders tend to hold jumbo loan borrowers to rigorous standards, which means you’ll need a high credit score and income, as well as significant cash reserves. |
| Adjust your loan term: If you have new financial goals, adjusting your loan term can help you make your monthly payment more affordable or help you pay off your loan more quickly. | High closing costs: The closing costs attached to a jumbo loan can add up quickly. It’s important to run the numbers to make sure this decision is worth the upfront costs. |
| Borrow your equity: If you’ve built home equity from paying down your loan balance or if your home’s value has increased, you can borrow a portion of it in cash to pay for major expenses, and repay it with your monthly mortgage payment. | Reset loan term: Unless you shorten your loan term, it will take you more time to pay off your mortgage, and you’ll likely pay more in overall interest. |
FAQ: Refinancing a Jumbo Loan
Here are answers to some common questions about refinancing a jumbo loan.
As of 2023, $726,200 is the conforming loan limit for most locations in the United States. With that, loan amounts above this cutoff point qualify as jumbo loans for most buyers.
If you’ve paid off enough of your loan balance, you may qualify for a conforming conventional loan to refinance your jumbo loan.
The Bottom Line on Refinancing a Jumbo Loan
If you have a jumbo loan, it’s possibly the largest financial obligation in your life. Refinancing a jumbo loan can have a significant effect on your finances. Everything from changing the interest rate to adjusting the loan term can help you manage this debt in a way that works best for you.
