What is a jumbo mortgage?
In order to understand what a jumbo loan is, it first helps to understand how the conventional mortgage system works. Most residential mortgages in the U.S. are backed by Fannie Mae and Freddie Mac. These two government-sponsored enterprises buy mortgages from lenders, bundle the ones with similar terms together, and then sell them as mortgage-backed securities to Wall Street investors. More importantly, they guarantee that if a mortgage defaults, they’ll pay off the loan to investors.
Each year, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, sets maximum amounts for the loans that they agree to purchase from lenders. In general, most loans fall within these limits, so they’re known as “conforming loans.”
However, in some areas, where the cost of living is higher, the standard conforming loan limit may not provide sufficient funds to buy a home. In these cases, it’s possible to get a loan that exceeds these limits, though it will often cost more. These larger loans are known as “jumbo loans.”
In 2019, the standard conforming loan limit is $484,350, while the loan limit for high-cost areas like Hawaii and Alaska is $726,525.
When should you refinance a jumbo mortgage?
If you already have a jumbo mortgage, here are some reasons you might want to refinance it:
If you want a better interest rate
One of the main reasons to refinance is to get a better interest rate. Your interest rate closely affects how much you pay for your mortgage each month. A lower rate will mean lower payments.
The rates you’ll be offered are largely a consequence of current market conditions and your credit score. Now may be a good time to refinance if:
- Current interest rates are much lower than they were when you first bought your home.
- Your credit score has improved drastically since you applied for your mortgage.
The Federal Reserve raised the federal funds rate four times in 2018, and two or three more rate hikes are expected in 2019, according to Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney.
Now is a good time to refinance, said Hillary Legrain, vice president of First Savings Mortgage Corporation in McLean, Va. “Because of the fluctuations in the stock market, rates are a lot lower than they were in the fall.”
If you need to cash out to cover expenses
Another reason to refinance is to tap into the equity of your home. Your home equity is the portion of your home that you own outright, or the difference between the value of your home and the balance on your mortgage.
When needed, that equity can be used to finance life’s big expenses, like medical debt, home improvements or college tuition.
One way to access your home equity is to do what’s known as a cash-out refinance. In a cash-out refinance, you replace your mortgage with another loan that’s bigger than what you owe on your home. You then receive that difference in the form of a cash payment, which you can use any way you want.
If you’re ready to change your loan terms
You may also be ready to refinance your mortgage if you’d like to change the terms of your loan. Usually, when we discuss loan terms, we’re referring to either the length of the loan or the type of interest rate.
Typically, a mortgage will be either 15 or 30 years in length. A 15-year mortgage lets you pay off your loan faster, but comes with higher monthly payments. A 30-year mortgage will keep your payments low, but it will take longer for you to truly own your home. Depending on how much you can afford to put aside for a mortgage payment each month, you may want to switch from one to the other with a refinance.
Alternatively, you may want to switch your interest rate type. There are two types of interest rates: fixed-rate and adjustable-rate. A fixed-rate mortgage stays the same over the life of the loan, while an adjustable-rate mortgage changes in accordance with current market interest rates. Many people decide to change to a fixed-rate mortgage because they want predictable monthly payments, but you may be able to get a lower interest rate if you go with an adjustable-rate option.
Challenges of refinancing a jumbo mortgage
Qualifying for a jumbo loan is more difficult than a conforming loan, Legrain said. “The lender is taking more of a risk because the balance on the loan is higher. As a result, the requirements that you have to meet in order to be approved are stricter.”
Below are some common qualifying requirements for jumbo loans:
Looking at your debt-to-income ratio is a way for lenders to measure how likely you are to be able to repay your debts. It’s the measure of the sum of all your monthly debts divided by your total monthly income.
“For a conforming loan, your DTI has to be less than or equal to 50%,” Legrain said. “But for a jumbo loan, that number drops to 43%.”
When you go to buy a home, lenders will look to make sure that you still have money in the bank after your down payment and closing costs. This money is known as cash reserves, and is usually expressed as the number of monthly mortgage payments you’d be able to make using those assets.
“The reserve requirements you’ll face will vary according to the lender,” Legrain said. “However, on a jumbo loan they will be much higher. You’ll be expected to prove that you have anywhere between six and 12 months of mortgage payments in the bank.”
The minimum credit score for a jumbo loan starts at 680, but could be even higher, according to Legrain.
In contrast, conforming loans guaranteed by the Federal Housing Administration (FHA) require a credit score of 580 to take advantage of its low 3.5% down payment. The FHA will accept even lower scores if you’re able to put down 10%. On the other hand, conventional loans require a credit score of at least 620.
Your loan-to-value ratio (LTV) is how much you’re looking to borrow in comparison to the overall value of your home.
Loan-to-value limits are usually lower for jumbo loans than they are for conforming loans. “On a no-cash-out refinance, you can go up to 97% with a Fannie Mae conforming loan amount, but with a jumbo loan you are usually restricted to 85%,” Legrain said.
Ways to get a low jumbo mortgage refinance rate
You’ll need to give your lender some financial information to find out whether they can approve you for a loan and, if so, at what rate, according to Legrain. They’ll want documents similar to those you’d provide for any refinance. They include:
- Copies of paycheck stubs for the most recent 30-day period
- W-2 forms for the previous two years
- A copy of your federal income tax returns for the previous two years
However, once you get one rate from a lender, don’t stop there. Shop around. Once you start getting pre-approved for a mortgage, you have a 45-day window during which all mortgage inquiries on your credit report will count as one. Credit bureaus agree to this because they realize that you’re only going to buy one home, and they want to give you a chance to find the loan that works for you.
In addition to getting loan estimates, Legrain stressed the importance of asking questions to find out if a particular lender is the right fit for you. She suggested the following questions:
- What rate can you offer?
- What are your fees?
- What are the loan-to-value restrictions?
- Are you local to my area?
“Working with a local lender is important because national lenders aren’t aware of local programs, so they get overlooked,” Legrain said. “Also, they may be using appraisers from out of the area, who may not know the differences in value between different neighborhoods.”
The bottom line
Getting a jumbo loan might be more complicated than getting a traditional mortgage. However, it can be done. By shopping around and making sure to ask the right questions, you should have a good chance of getting a jumbo loan refinance that works for you.
This article contains links to LendingTree, our parent company.