Is it Time to Refinance your Jumbo Mortgage?
A small decrease in mortgage interest rates encourages many homeowners to apply for a home refinance in order to save money on monthly payments and to save thousands of dollars in interest over the length of the mortgage. In many cases, homeowners will opt to refinance in order to reduce their housing expenses so that they can pay off high-interest debt more quickly.
While most people know that refinancing into a lower interest rate can be beneficial, they may not realize how much they can save with a low-cost refinance. For example, if you have a $300,000 home loan at 5.917%, your monthly payment would be $1,783. The same $300,000 mortgage loan at 4.378% has a payment of only $1,490, or nearly $300 per month less. In this example, refinancing your home loan to the lower rate could save you almost $3,600 per year, allowing you room in your budget to decrease debt or increase savings.
Bigger is better
The impact of a home refinance into a lower mortgage interest rate becomes more significant as the size of the loan increases. Jumbo loans of more than $729,750 carried interest rates as high as 6.86% just one year ago and recently have been quoted with interest rates as low as 5.48%. Lenders typically charge higher rates on these loans because they are considered riskier, in part because they involve larger amounts of money. In addition, particularly in recent years, it can take longer and be more difficult to sell a more expensive home, making banks more reluctant to take on the risk of a foreclosure.
Refinancing your home with a jumbo loan can make a significant difference in your monthly budget. For example, an $800,000, 30-year fixed-rate loan at 6.86% has a monthly payment of $5,247. Refinancing into a 30-year fixed-rate loan at 5% would reduce the monthly payments for that home to $4,295, a savings of $952 every month.
Qualifying for a jumbo loan
In addition to carrying higher interest rates, jumbo loans typically have stricter qualification standards. Consumers who want to buy a home with a jumbo loan are often required to make a down payment of up to 40%. Lenders expect these borrowers to have a credit score in the 700s.
When refinancing a jumbo loan, the loan qualification will be based on the amount of equity available in the home along with the borrower's credit score and debt-to-income ratio. In many cases, the borrower's debt-to-income ratio can be significantly improved with a new loan. As in the example above, paying $950 less on the housing payment should make staying within the maximum debt-to-income ratio easier.
Refinancing options for a jumbo loan
Homeowners with significant equity in their homes have the most flexibility when it comes to refinancing. First, qualifying for a home loan approval becomes easier when the owners have equity of at least 20 to 25%, since lenders will view this as a less risky investment.
Second, homeowners with equity have the option of a cash-out refinance along with the possibility of still making lower monthly payments if the interest rate difference is substantial. For example, the borrower cited above with an $800,000 home loan may have enough equity to take out $100,000 to use to pay off other debts, to make home improvements or pay college tuition, making the new home loan $900,000. The monthly payment on a $900,000 loan at 5% would be $4,831, which is still $416 less per month than the payments on an $800,000 loan at 6.86%.
Refinancing a home can be a good way to reduce monthly expenses and increase the availability of cash for paying other bills and saving for long-term goals. Just remember to do some important calculations before agreeing to a refinance: First, decide how long you will stay in the home. Refinancing rarely makes financial sense for short-term homeowners. Second, ask your lender for an estimate of the closing costs and fees you must pay. Typically, closing costs are 3% to 6% of the loan amount. Calculate how long it will take you to recoup those costs with your monthly savings to be sure refinancing is worthwhile for you.