Can You Refinance a Jumbo Loan?
With apologies to noted author Charles Dickens, "A Tale of Two Cities" might be the best way to describe the current state of housing. On the one hand, you have fixed rates. Unlike the 1970s, where higher interest rates were the norm, they're currently at record lows, averaging 3.75% for the week ending July 25, according to Freddie Mac.
On the other side are home equity and asking prices. With home loan applications moving at a feverish pace, combined with low inventory, home values continue to climb, having risen far beyond 12 months straight - but 88 months in a row, based on the most recent statistics available from the National Association of Realtors. In some metropolitan areas, median existing-home prices are above $500,000, prompting many people to apply for jumbo loans, which are non-conforming mortgages that exceed the limits set by Freddie Mac and Fannie Mae (i.e. $484,350). Although jumbo loans tend to have stricter approval requirements than conventional loans or USDA-RA loans - such as a higher down payment - they can be worthwhile because jumbo loans offer flexibility, with monthly adjustable-rate mortgage payments or fixed-rate mortgage payments.
With these two realities as a backdrop, it raises a key question: Are jumbo loans so flexible as to allow for refinancing? In other words, can you refinance a jumbo loan to take advantage of today's more affordable interest levels, which have dipped rather appreciably since 2018?
The short answer: Yes. But before we get into the finer details, it's helpful to get an understanding of just what refinancing means and why so many people are taking advantage of it.
Why should you refinance?
At its core, refinancing allows you to reduce what you spend in monthly payments. Generally speaking, when people apply for mortgages, it's typically for purchasing purposes, as detailed weekly by the Mortgage Bankers Association. But in recent months, applications are increasingly for refinancing motivations. Indeed, for the week ending July 26, more than half of all applications were filed to take advantage of refinance rates.
Even an incremental difference in lower interest can result in tens of thousands of dollars saved over the life of a loan, hence the reason why more mortgages are taken out for better loan terms and refinancing for a lower loan amount.
All that being said, since the underwriting standards for jumbo loans are more stringent than conventional loans, you may wonder whether the same standard applies to refinance a jumbo. Well, let's take a look:
Your credit report has a lot of information on it, but the data most relevant to refinancing approval is your FICO® score. The higher it is, the better you are about paying your bills on time. Generally speaking, your score should ideally be above 700, but it's possible to still qualify with a lower score. Just be mindful of the fact that the degree to which your rate is lowered may in part depend on the score spectrum.
Your debt-to-income ratio, which is represented as a percentage, shows how much of your monthly income is devoted to ongoing payments. It's determined by adding up what you spend on things like your car loan, credit cards and other installment loans and dividing the sum by what you earn in monthly salary before taxes. For example, if your DTI is 33%, that means one-third of your earnings per month goes toward debt. To get a Qualified Mortgage, the highest ratio allowable is 43%, according to the Consumer Financial Protection Bureau. The same rule holds for refinancing a jumbo loan - the maximum is 43%.
Here's another data point that is based on a percentage, only this one tells you how much you're borrowing versus the asset or loan you seek to obtain. Like the DTI, it involves addition and division, but instead of how much you earn, it's based on how much you borrow compared to spend. An LTV of 70%, for example, means that 70% of what you're borrowing is the equivalent worth of the house. The lower the LTV, the less risk involved for your lender because you have more skin in the game, which is usually in the form of a down payment. Generally speaking, refinancing a jumbo loan requires an LTV of no higher than 80%.
Similar to approval for a jumbo loan, refinancing one typically entails a down payment of 20% or more, but in the form of equity you have in the property.
Another issue your lender will want to look into is whether you've defaulted on any loans or credit card payments. They'll want to ensure that you haven't experienced bankruptcy within the previous seven years, but again, the specific number of years may be different and taken into consideration in concert with other variables.
Traceable cash flow
Similar to approval for a purchase loan, a refinance loan entails a paper trail. Expect to be asked for at least two years' worth of tax returns, W-2 forms, bank statements from the previous month and pay stubs, usually from the two most recent periods.
Should you refinance?
Refinancing, much like actually applying for a house, is a highly personalized process that is loaded with different factors that ultimately dictate whether you'll be approved. However, just because you can refinance a jumbo loan doesn't necessarily mean that you should. Interest rates may be such that making the move is not in your financial interest. Further, you may have already paid off enough of the principal that refinancing at this point doesn't make sense.
If you still have questions about approval and the documents to gather, talk to your lender. They'll go through it all so you're clear on how - or whether - to proceed.