How to refinance a jumbo mortgage

Jumbo mortgages are helpful when purchasing high-value homes where mortgage financing exceeds conforming loan limits. Conforming mortgage limits are set by the Federal Housing Finance Agency (FHFA). These loans are purchased by government-sponsored enterprises Fannie Mae and Freddie Mac, reducing the lender’s risk if you default. Jumbo loans are usually kept by the lender, so lenders want to ensure you’re financially secure and will repay the loan.

Due to their high loan amount, jumbo mortgages are more challenging to refinance than traditional ones. You need to prove you are a good candidate for refinancing.

The jumbo refinancing process

As a homeowner with a jumbo mortgage, you probably already know how strict the requirements are. Generally, lenders require you to provide more documentation and have a better financial status than for standard mortgages. Refinancing a jumbo loan has similar requirements. Lenders look for a high credit score, a good debt-to-income (DTI) ratio and cash reserves.

• Credit score: Your credit score is used to check your financial responsibility. Jumbo mortgage lenders want to ensure you have a high score.
• Debt-to-income ratio: Your DTI ratio is your monthly gross income compared to your current debts. Lenders are less likely to lend to you if you have a high debt-to-income ratio. This shows you may not have enough savings to cover your loan payments.
• Cash reserves: Lenders want to know you have enough money saved to make your monthly mortgage payments in the event of unforeseen circumstances or financial hardship. They need proof of cash savings in the form of bank statements.

Documents required for refinancing

When you apply for jumbo refinancing, your lender needs proof of your income and assets. To start the refinancing process, you’ll likely need the following documents:

• Two years of annual tax returns, including W-2 forms
• Most recent pay stub or other proof of income
• Past 60 days of bank statements
• Profit/Loss and balance sheet for self-employed borrowers
• Documentation of any other income, including commissions, bonuses and other deposits

Jumbo refinance considerations

Showing you’re financially healthy is important when refinancing. But there are other factors that could affect your application. These include bankruptcy and foreclosure, closing costs and processing time.

Bankruptcy and foreclosure

Even with a high credit score, a bankruptcy or foreclosure on your credit report can make lenders unsure. You probably need to wait until they’ve fallen off your credit report, which can take anywhere from 7 to 10 years.

Closing costs

Although you already paid closing costs for your initial jumbo mortgage, you may have to pay additional costs when you refinance. Depending on the terms of your refinance, closing costs can be paid upfront or rolled into your monthly payment.

Longer processing time

Because jumbo refinancing is manually underwritten, it may take longer to process than standard refinancing. The volume of documentation takes time to review. Additionally, lenders will take a closer look at everything given the higher risk. If they see any red flags, the process could be delayed. Or they may ask you to reapply later. You’ll then need to spend time fixing the issues before applying again.

When is the best time to refinance?

You can refinance your jumbo mortgage at any time. Because jumbo loans are riskier to take on, there aren’t as many lenders willing to offer refinancing. It’s best to find an established, trusted lender who can offer jumbo refinancing at competitive rates.

If you have any negative items on your credit report, it may be best to wait until they fall off. Also, if your cash reserves or credit score are low, try to improve them before starting your application.

Advantages and disadvantages of refinancing your jumbo mortgage

Whether you're refinancing to adjust your interest rate, alter the length of your loan or just looking to free up some cash flow, refinancing your jumbo mortgage is a complex process. Consider the pros and cons of refinancing before you move forward.

Advantages of jumbo refinancing

• Higher mortgage financing: Jumbo refinancing is not limited by the FHFA limits.
• Single payments: Rather than getting multiple loans, you can get one mortgage for one regular payment.
• Improved interest rates: Depending on the market, you may be able to get a better interest rate when you refinance.
• Financial liquidity: You could free up additional cash flow by refinancing.
• Shorten or lengthen term: You can adjust your loan term. Shortening the term may help you save on interest, while a longer-term may reduce your monthly payments.

Disadvantages of jumbo refinancing

• Possible higher interest: Small differences in interest rates add up quickly in jumbo loans. Shop around for the best interest rate when refinancing your loan.
• Difficult process: Jumbo loans come with higher risks for the lender which makes the refinancing process time-consuming. This also means the requirements can be stricter than conforming mortgages. Lenders usually look for high credit scores, low DTI ratios and good cash reserves.
• Limits on cash-out refinancing: There are limits on the amount of money you can take out with jumbo refinancing. The limits vary between lenders, so it’s best to get more than one quote for a good comparison.

Refinance your jumbo mortgage

If you think it’s time for you to refinance your jumbo mortgage, shop around for the best interest rates and loan terms. Consult with a professional Home Lending Advisor to ensure you have all the information and documents you need to apply. Use a mortgage calculator to decide if the new terms are within your budget. When you're ready, take the next step and apply for a jumbo mortgage.