How Does a Jumbo Mortgage Refinance Work?

Refinancing a jumbo mortgage has tough application requirements. A jumbo loan is a mortgage that exceeds Freddie Mac and Fannie Mae conforming loan limit of $726,200, or up to $1,089,300 in some high-cost areas. With a jumbo mortgage, a small interest decrease can lead to significant long-term savings. Find all the details you need for a jumbo mortgage refinance below. 

What Is a Jumbo Mortgage Refinance?

A jumbo refinance loan is similar to a standard mortgage refinance but for jumbo loans that exceed Freddie Mac and Fannie Mae's conforming loan limit. 

To refinance a jumbo mortgage, you'll usually need a loan-to-value ratio of around 80%, a minimum 660 credit score and a well-documented income history.

Can You Refinance a Jumbo Loan?

Yes, you can refinance a jumbo loan. The process is similar to any other mortgage refinance, but it may have more stringent requirements. In general, lenders who issue jumbo mortgages often have higher standards for homeowners than conventional mortgages, so you'll need to meet those requirements for a second time. 

Not all lenders are willing to refinance a jumbo loan. Bigger loans also have more risk, which means lenders are more selective about who they approve for a jumbo loan refinance.

When Should You Refinance a Jumbo Loan?

Refinancing a jumbo mortgage can make sense for several reasons. A few of the most common are lower monthly payments with a longer term or lower interest rate. You might also want to cash out some of the equity in the property with a refinance. 

Get a Lower Interest Rate

If you have a fixed-rate jumbo loan and interest rates have dropped, refinancing could help you save significantly on mortgage payments. Here's an example:

Suppose you purchase a $1 million property with a 10% down payment and a jumbo 30-year mortgage with a 7% interest rate. Over the 30-year term, you'd end up paying more than $1 million in interest. 

If three years later, interest rates have dropped to an average of 4.5%, you could refinance the $870,543 remaining in mortgage principal and save about $1,575 in monthly payments, down to $4,411 from $5,988. But more impressively, you'll save over $350,000 in interest over the life of the mortgage. 

Switch to Variable Interest 

If you've had a fixed interest rate and suspect rates will go down even more, you can also choose a variable interest rate. Of course, this comes with the risk that interest rates don't follow the expected trend and increase instead. 

Have Interest-Only Payments

Some mortgage refinances offer an interest-only payment period. During this time, you'll make interest payments but won't be required to make payments on the principal. This can help you to save on monthly mortgage payments if funds are tight short term. 

Lengthen Your Loan Term

When you refinance, you could choose a 30-year loan term. If you're already five, 10 or 20 years into your existing mortgage, this gives you the option to extend the loan term and spread out repayment over a longer term, reducing monthly payments. 

Shorten Your Loan Term

If you want to pay off your jumbo mortgage faster, refinancing with a shorter loan term could save you even more. It's usually only worth refinancing if the interest rate is also lower or your existing lender charges an early repayment penalty. However, they may still charge an early repayment penalty for a refinance, so it's important to check with your mortgage lender to understand the terms. 

Get Cash Out 

If you've built equity in your home, refinancing can be a way to get cash out of the property. Suppose you had a jumbo mortgage loan of $1 million and you've paid $400,000 in the principal. You could refinance a take $100,000 for home renovation projects, savings or any other financial needs. 

Tap Into Your Home’s Equity

Like cashing out, a refinance lets you tap into your home's equity. If the property you purchased for $1 million is now worth $1.5 million, you could also have built extra loan-to-value (LTV) in the property. How much equity can you take out? The maximum LTV ratio for borrowing is determined by lender limits. For jumbo loans, you can usually take up to 80% LTV.

How to Refinance a Jumbo Mortgage

If you're ready to refinance a jumbo mortgage, take the following steps. 

Contact Multiple Lenders to Compare Offers

Start by researching lenders and comparing loan offers. Because interest rates have such a major impact on monthly payments and long-term costs, even a one-tenth percentage could make a difference, especially on a jumbo loan.

You'll also want to check the lender's reviews and overall reputation to choose the lender you want to work with. 

Check Your Eligibility

Lenders will look at your credit score, debt-to-income ratio, payment history, home equity and employment history. Here's what you'll need to have prepared:

• Credit score: Your credit score demonstrates financial responsibility and the likelihood that you'll repay the loan on time. Lenders look for a 660-plus credit score for jumbo mortgages, but the higher your credit score, the better the possibility is for lower interest rates.
• Debt-to-income (DTI) ratio: The DTI ratio is the ratio of your monthly gross income compared to total monthly debt payments. Lenders usually look for a DTI of 40% or less.
• Cash reserves: This assures lenders that you can make monthly payments even in the case of financial hardship. You'll usually need to provide proof of cash savings in the form of bank statements.
• Stable employment: Especially for a jumbo mortgage, you'll need to demonstrate stable employment with stable or increasing income.  

Get Prequalified 

For prequalification, lenders will check the documentation above and issue a prequalification letter. You can apply for multiple prequalifications within 45 days and have it count as a single credit check on your credit history. Then, you can compare lender offers. 

Apply for the Loan

Applying for the loan will require additional information, including a government-issued ID, proof of employment, income, savings and other assets, plus any additional lender requirements. Usually, you'll need to provide:

• Most recent pay stub or other proof of income
• Two years of annual tax returns, including W-2 forms
• Past 60 days of bank statements
• Profit/loss and balance sheet if you're self-employed 
• Documentation of other income, such as commissions and bonuses

Complete Underwriting

Underwriting is the verification process lenders go through. This can include an assessment and inspection of the property as well as verification of the documentation and information you provide. 

Review and Close on the New Jumbo Loan

Once underwriting is complete, you'll receive final refinance loan approval and can close on the new jumbo loan. Congratulations! You've refinanced your jumbo mortgage. 

Pros and Cons of Refinancing Your Jumbo Mortgage

There are pros and cons to refinancing a jumbo mortgage. Here is what you'll want to consider. 

Pros

• Access equity: If you need money for other projects, a jumbo mortgage refinance can give you access to needed cash. 
• Improved interest rates: Refinancing may lead to better interest rates, which can lead to short- and long-term savings.
• Financial liquidity: If you need to liquefy some of your asset value to improve cash flow, refinancing is a good solution. 
• Shorten or lengthen term: When you refinance, you can adjust your loan term. You could save on interest by shortening the loan term or reduce monthly payments by lengthening the mortgage term. 

Cons

• Closing costs: You'll have to pay closing costs when you refinance. 
• Longer processing time: Jumbo mortgage underwriting is manually processed, so it can take longer to close. 
• Stricter requirements: You'll need to meet lender requirements, which are typically more stringent than requirements for conventional mortgages.  
• Possible higher interest: There's no guarantee you'll secure a lower interest rate, and even small differences can add up quickly on a jumbo mortgage. 
• Limits on cash-out: The amount of money you can take out with jumbo refinancing is limited and varies by lender. You can compare quotes to see how much cash you can access if that's your reason for refinancing. 

Compare the Best Jumbo Mortgage Refinance Companies from Benzinga’s Top Providers

Find some of Benzinga's best mortgage refinance companies and compare rates to refinance your jumbo mortgage here. 

Should You Refinance a Jumbo Mortgage?

If interest rates have dropped or you need to change your mortgage term, refinancing can be smart. You might also choose to refinance a jumbo mortgage to access equity for home repairs, tuition payments or other financial needs. How much you can save on interest or access in cash depends on the lender and other individual factors. However, it's important to ensure that you can meet refinance qualification requirements and prepare all documentation before comparing lenders and rates. Remember to shop around to find the most favorable terms for your needs. You can also learn more about jumbo mortgage rates or find the best jumbo mortgage and jumbo refinance lenders here. 

Frequently Asked Questions