The Pros and Cons of Refinancing Your Jumbo Mortgage

If you locked in a fixed-rate jumbo mortgage before the end of 2021, you may have been lucky enough to secure an interest rate between 3% and 4%. Mortgage interest rates began climbing in early 2022 alongside federal interest rate hikes, settling at around 7% for a 30-year fixed-rate jumbo loan in May 2024.

If you’ve taken out a jumbo mortgage in the past few years, you might be considering refinancing as an option to save money over the life of the loan. After all, a few percentage points can make a big difference in how much you’re paying monthly and how much you’ll pay over time, especially considering the size of a jumbo loan.

Here, we’ll cover how jumbo loan refinancing works, the pros and cons, and how to know if it’s the right time to refinance.

What is jumbo mortgage refinancing?

Refinancing a jumbo mortgage is similar to refinancing a smaller mortgage. The key difference is in the size of the loan and the requirements to refinance. A jumbo loan is considered a non-conforming loan because it refers to any mortgage above the conforming loan limit (CLL) set by the Federal Housing Finance Agency (FHFA). In 2024, the FHFA set the CLL for one-unit properties at $766,550, with higher values for areas with higher costs of living, such as Hawaii, Alaska, and the U.S. Virgin Islands.

Like refinancing conforming loans, a homeowner can remove some equity from the home as part of the transaction or simply modify the loan itself. These are known as cash-out refinances and rate-and-term refinances, respectively.

The reasons behind refinancing a jumbo mortgage tend to closely align with reasons homeowners refinance smaller loans, namely to:

1. Save money by locking in a lower interest rate or converting from an adjustable rate to a fixed-rate mortgage.
2. Change the loan term from 30 to 15 years to save on interest or from 15 to 30 years to lower monthly payments.
3. Tap into a property’s equity and use that money for other financial endeavors.

The benefits of refinancing

There are several benefits of refinancing a jumbo mortgage, including:

• Locking in a lower monthly payment through reduced interest rates: As interest rates fall, you could save a considerable amount each month through even a .75% or 1% drop in your mortgage interest rate.
• Ability to access equity for home improvements or investment opportunities: A cash-out jumbo refinance can grant quick liquidity by allowing you to tap your home’s equity and use the cash for other reasons, whether that’s a property upgrade or investment opportunity.
• Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage: In uncertain economic times, you may feel more comfortable having a locked-in fixed-rate mortgage instead of one that can change.  

Refinancing: potential drawbacks and challenges

You’ll also need to consider these potential downsides of a jumbo loan refinance.

• Closing costs and fees associated with refinancing may be significant: Since the cost to refinance is typically a percentage of the loan, you’ll end up paying more with a jumbo loan than a smaller, conforming one. For this reason, running the numbers and determining your breakeven date is critical to ensure the cost of refinancing makes sense based on how long you plan to own the property.
• Extended loan terms can lead to higher overall interest payments: While many homeowners move from a longer to a shorter-term loan to pay off the mortgage early, you may also decide to extend the loan term to increase monthly cash flow with a lower mortgage payment. Keep in mind that extending the term could mean paying more in interest over time.
• There are steep qualification requirements and creditworthiness considerations: Lenders offer jumbo loan refinancing to the most qualified candidates. So, you may not be approved if there’s anything off with your credit score, DTI, or proof of assets.
• You may face a long wait time due to the complex approval process: The process to refinance a jumbo loan requires a lot of documentation and manual review. For these reasons, it can take much longer than the typical 30-45 days to refinance a smaller mortgage.

Is now the right time to refinance your jumbo mortgage?

The first step in deciding if it’s the right time to refinance your jumbo mortgage is to check whether you meet the financial requirements. Lenders will look at:

• Credit score: Typically, lenders require a credit score in the mid-700s or better.
• Debt-to-income ratio (DTI): Lenders are most likely to favor a DTI of 40% or lower.
• Access to cash savings: Since lenders assume more risk with a jumbo mortgage, they’ll require proof that you can pay cash to cover the mortgage for a period of months, often six to 12.
• Proof of income and assets: Lenders will want to see that you have a steady, stable income and assets before they approve a refinance.

If you check all the boxes for an ideal borrower, you’ll need to assess the market and interest rate trends. General wisdom says that you’ll want to cover the cost of the refinance with savings. So, understanding how long it will take to recognize those savings is important. Mortgage refinance calculators can help you find the breakeven point where your savings have exceeded what you paid at closing to lock in the new rate.

Alongside the breakeven point, it’s also critical to understand how interest rates are trending. If rates are trending downward and the Federal Reserve is poised to make significant rate changes, it may benefit you to wait until you can secure a meaningfully lower rate than the one you currently hold.

Since there’s a significant amount of money on the line when you refinance a jumbo loan, it may pay to consult with a financial professional who can help you run the numbers and determine the implications of refinancing now vs. in the future.

Alternatives to refinancing

There are several alternatives to refinancing that you may want to consider depending on your goals and financial situation.

HELOC

If you’re looking to increase liquidity, opening a home equity line of credit (HELOC) is an option to explore. A HELOC taps into the existing equity in your home, giving you access to that equity through a revolving line of credit. That means you can use as much credit as you want up to the limit and then pay it down on your own schedule. Often, HELOCs require interest-only payments on the balance for the first few years during the draw period. However, it’s important to note that many HELOCs have adjustable rates, so even if you’ve had a stable rate for a few years, sudden federal rate increases could send your rate up, and you could pay more in interest.

Loan modifications

If you find yourself unable to pay your mortgage, you may be able to work with your lender on a loan modification. Modifications can include restructuring the mortgage for the lender to recoup missed payments at a later date or waiving penalties so you can resume a normal payment cadence. Keep in mind that a loan modification may impact your credit score since you’ve likely already missed payments in getting to this point. And it’s up to your lender how flexible they’re willing to be with these changes.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.