Refinance Jumbo Loan: A How-To Guide With All You Need To Know

Do you have a jumbo loan on your current home? When you got your original mortgage, you may remember your lender talking to you about this type of loan, which is for high-cost homes or housing markets.

Now, a few years later, you may want to shorten your loan term, lower your monthly payment or take out cash for home improvements. Mortgage refinancing – particularly, a jumbo loan refinance – may be the right move for your particular situation.

Read on for more information about a jumbo loan refinance, how to do it and whether it ticks all the boxes for you.

What Is A Jumbo Loan Refinance?

Before we define a jumbo loan refinance, it's important to understand jumbo loans first. A jumbo loan is a nonconforming loan offered by private lenders and not backed by the federal government. The baseline conforming loan limit for a single-unit home is $726,200 in 2023, and the limit is higher in Alaska and Hawaii – $1,089,300 for a single-unit property. A jumbo loan covers more than these amounts, depending on where you live.

A refinance means that you replace one loan with a new one. If you owe more on your principal mortgage balance than the conforming loan limits allow, you'll need to refinance into another jumbo loan. However, if what you owe is within the conforming loan limits, you may not have to refinance with a jumbo loan – you may qualify for a conforming conventional loan. You then go through the same mortgage process like you did the first time – lenders check things like your credit score, debt-to-income (DTI) ratio and loan-to-value (LTV) ratios and cash reserves.

Types Of Jumbo Loan Refinances

You might be thinking about refinancing for various reasons, so let’s take a look at the types of refinances available and which refinance best suits your needs.

Cash-Out Jumbo Refinance To Tap Home Equity

A cash-out jumbo refinance allows homeowners to take advantage of their home equity by turning a portion of it into cash. These types of refinances give homeowners the money to make major home improvements, consolidate debt or meet a major financial obligation like a college tuition payment or an unexpected medical expense.

Be aware that because your lender is advancing cash to you, the homeowner, they’ll likely take a closer look at your financial situation and may require a more thorough appraisal process. 

Rate-And-Term Jumbo Refinance To Lower Your Monthly Payment

With a rate-and-term refinance, you’re replacing your current mortgage – at a better rate – and getting a lower monthly payment. There’s no cash back to the homeowner, and all the equity gets transferred to the new loan.

You can choose the same loan repayment term or a longer or shorter one. For example, if you bought your home 5 years ago with a 30-year fixed mortgage but believe you could now comfortably afford a 15-year fixed mortgage payment, you may want to opt for the shorter repayment period so you can pay off your mortgage in 20 years.

On the other hand, if you’ve experienced an economic downturn, you may want to consider another 30-year fixed-rate mortgage to help lower your monthly mortgage payment. For example, if the homeowner is 5 years into their repayment term when they lose their job, they can refinance into another 30-year fixed. They’ll be repaying their loan over 35 years, but once the job situation is resolved, they’re free to refinance again in the future to shorten their payback. 

Cash-In Refinance To Pay Your Mortgage Off Faster

If you want a second chance to buy your home, a cash-in refinance may be right for you.

Let’s say you bought your home with the minimum down payment required, often 20% for a jumbo loan. Let’s assume that 5 years later, you got a big bonus that you wish you’d received when you were buying your home.

You can still apply that bonus to your home equity, either by asking your current lender to do a mortgage recast or by applying for a cash-in refinance. You may also qualify for a lower interest rate if your credit score is stronger now.

Requirements For Refinancing Jumbo Loans

The requirements for refinancing jumbo loans can look similar to when you qualified for a jumbo loan the first time around:

• Credit score: Your credit score is important to your refinance application. Check out your credit report, which records your credit history, to ensure it is correct. (Errors can happen, and they do for many borrowers!) You'll need a credit score of 680 or higher to qualify for a Jumbo Smart loan.
• Debt-to-income ratio (DTI): Your debt-to-income ratio refers to the amount of debt you have compared to the amount you bring into your home. You can calculate DTI by adding monthly debt repayments (excluding food and utilities) and dividing that amount by your monthly gross income. Multiply the result by 100 to find your DTI percentage. Your DTI can't exceed 45% for a Jumbo Smart refinance.
• Loan-to-value (LTV) ratio: LTV considers the equity you've built in your home – you can calculate it by dividing your remaining loan balance by the current value of your home. In other words, if you have home equity of 20%, you then have an LTV of 80%. Your LTV can't exceed 89.99% for a Jumbo Smart refinance.
• Cash reserves: Cash reserves means having extra money around to weather a job loss or other economic hardship. To qualify for a jumbo loan refinance, you'll need 6 months' reserves if your loan is less than or equal to $1 million. For amounts over $1 million, you'll need a year's worth of reserves.
• Home appraisal: Appraisal requirements for refinancing a jumbo loan simply means you'll make your home available for an appraisal, which ensures your home is worth the money you hope to borrow. In an appraisal, a professional appraiser looks over the home and makes an unbiased opinion of the home's current value. You'll need a full home appraisal for a Jumbo Smart refinance.

Pros And Cons Of Refinancing A Jumbo Loan

Before deciding whether to refinance, consider these pros and cons.

Pros

The pros include:

• Reducing monthly mortgage payments: Jumbo loan refinancing means you can reduce your monthly mortgage payments. For example, if you extend your loan term, you may end up with smaller monthly payments after refinancing.
• Lower interest rate: Refinancing a jumbo loan could mean you get a lower interest rate, potentially saving you thousands of dollars over your loan term.
• Could access cash: You can access a lump sum of cash with a cash-out refinance. If you have a project or financial need that necessitates cash, consider a cash-out refinance.

Cons

The downsides of refinancing a jumbo loan include:

• It's complicated: The refinancing process can take longer for a jumbo loan refinance because it’s more complex than other types of refinance loans, such as a refinance for a conforming loan.
• Closing costs: Like when you got your original mortgage, you'll pay closing costs. Closing costs are the fees associated with "tying up your loan," including appraisal fees, title insurance and origination fees. Closing costs typically cost between 2% – 6% of the total loan amount. Jumbo loans typically have higher closing costs because of their higher loan amounts.
• Stricter requirements: Refinance requirements can be stricter than other types of home loans. Credit scores, DTI, LTV, cash reserve amounts and home appraisal requirements will also require more scrutiny than a conventional loan.

How To Refinance A Jumbo Loan

The steps to refinance a jumbo loan may look like the following:

1. Make sure you meet the financial requirements: Do you fit the financial requirements listed above, including the cash reserves requirements? Check your credit report to ensure that nobody else's name was inadvertently substituted for your own or if one of your credit accounts is still open when it should say "paid off."
2. Shop and compare lenders and rates: Did you know you don't have to refinance with the same lender that provided your original loan? You can compare a handful of lenders and their interest rates to ensure you get the best financial benefit through a refinance.
3. Apply for approval: Do you remember applying for initial approval and getting a mortgage preapproval letter from your lender when you bought your house? For a refinance, you'll likely be asked for your two most recent pay stubs, W-2s and most recent bank statements.
4. Get a home appraisal: A professional appraiser will look over the home's size, shape and structure and compare it to other comparable properties in a home appraisal. An appraiser does this to ensure that it "fits" the amount the lender will approve for a refinance. Lenders may have stricter appraisal requirements because a jumbo loan involves a lot of money.
5. Close on the loan: Once your lender completes underwriting and the home appraisal process, you'll close on your loan. Look for a Closing Disclosure document a few days before closing, outlining the final figures for your refinance. At closing, you review the loan details and sign your documents. You'll get your funds after closing if you choose a cash-out refinance. The funds from your refinance pay off your original mortgage after closing, and you'll then make payments on your new loan.

FAQs About Jumbo Loans And Refinancing

We'll look into the most frequently asked questions about jumbo loans and refinancing.

What are current jumbo loan refinance rates?

Jumbo loan refinance rates depend on several factors, including your loan term, credit score, DTI, LTV and more, so no one "bullseye" answer will tell you the rate you'll get. Your best bet? Learn more about refinancing and get your personal rate by talking to your lender.

How much does it cost to refinance a jumbo loan?

Refinancing a jumbo mortgage isn't free. You'll need to pay between 2% – 6% of the home's purchase price to cover closing costs for a jumbo mortgage. The exact percentage depends on your lender. Review how much it will cost to refinance a jumbo loan over time.

What are the alternatives to refinancing a jumbo loan?

Instead of pursuing a jumbo loan, consider tapping into other ways to access your home equity, such as a home equity loan or line of credit. Both options usually have higher rates than 30-year fixed-rate mortgage refinance loans but less than unsecured credit cards. A home equity loan is an additional loan on the home – you make two monthly payments. A HELOC is a revolving credit account that you draw on as needed, like a credit card.

When should I refinance my jumbo loan?

It would be best to consider refinancing your jumbo loan when it makes financial sense. For example, a refinance might be a great option if you know you'll save money through a better term or interest rate.

The Bottom Line

Jumbo loans refinancing should benefit you financially or help if you're in a financial pickle and need extra money. You can consider several jumbo loan refinances: cash-out, rate and term and cash-in refinances. Ensure that you meet the requirements, consider the alternatives and apply for a cash-out refinance with Rocket Mortgage^®.