The dos and donts of refinancing your jumbo loan

What are jumbo loans?

Jumbo loans are mortgages typically reserved for borrowers purchasing high-value properties. Unlike conforming loans, jumbo loans, also called non-conforming loans, aren’t backed by the government, so the lender has fewer guarantees of collecting the full amount if the borrower defaults. 

As a result, jumbo loan borrowers may have more hoops to jump to access it, although first-time home buyers can still apply. For instance, a borrower must have an impressive credit score, history, and substantial income to qualify. 

Loan terms vary from lender to lender and are impacted by an individual’s creditworthiness and property location. Jumbo loans are available through fixed or adjustable interest rates. 

How does refinancing work?

Refinancing, or refi, means taking out a new mortgage to revise the terms of your current loan. Getting more favorable loan terms, particularly lower interest fees and shorter repayment periods, is often the primary motivation for most borrowers. It’s often an ideal solution as changes to the mortgage market become evident.    

Those eyeing to refinance can apply when the interest rates drop or when their financial profile further improves. It can also be initiated to change a fixed-rate mortgage to variable or adjustable rates or vice versa. Once approved, a new credit agreement replaces your old contract, which can be used to your advantage.

Dos and don’ts of jumbo loan refinancing

Refinancing a jumbo loan can help you stay on top of your finances. However, this decision shouldn’t be taken lightly. A borrower must do their homework and heed the following to make an informed decision.    

Dos

Understanding why you need to revise your current loan terms and revisiting your financial situation, alongside your long-term fiscal goals, are the fundamental steps in this process.  

Seek an expert’s opinion

Identify the pros and cons of refinancing according to your financial profile and investment goals. Discuss them with professionals like a financial planner or a mortgage broker. These experts can help you choose the right refinancing product and offer that aligns with your goals. 

For instance, if you plan to refinance your home to diversify your portfolio, you might need to develop risk-mitigating strategies for debt repayment if your rental property doesn’t perform as expected.    

Ensure long-term savings

As mentioned, reduced interest fees are one of the primary benefits of refinancing a jumbo loan. To make this work, analyze the impact of amending your current mortgage terms, for instance, switching from a fixed rate to an adjustable-rate mortgage ARM or vice versa.

Fixed rates offer predictability, as your interest rate doesn’t fluctuate during the mortgage’s lifespan. Conversely, ARM costs vary depending on market and economic conditions and, at certain times, may be lower than the fixed rate interest rate. Find out whether a fixed or adjustable-rate mortgage works best for you. 

Consider other financial factors

Refinancing has associated costs since you’re getting a new mortgage. Lenders may require you to pay for application costs, appraisal fees, insurance, and, in some states, lawyer’s fees, as you would when you applied for your existing jumbo mortgage. 

The closing costs for refinancing cover up to 6% of the total loan balance on average. Similarly, some impose a prepayment penalty fee for paying off your loan early. Discuss these upfront costs with the lender’s representative before signing the contract. 

Shop around to find the best offer

As with applying for a new mortgage, looking at various offers could help you save anywhere from hundreds to thousands. You’re not legally obliged to refinance with your current lender exclusively. Hence, don’t hesitate to switch to a different one if it’s more reasonable or if you can negotiate for better rates and terms.

Don’ts

Taking out a loan is a long-term financial obligation. Avoid borrower’s regret by scrutinizing offers and staying on top of your finances. Here are a few things to avoid when looking to switch your current jumbo loan terms:  

Take out other loans

As with a new jumbo mortgage, a prospective refinancing borrower must maintain a high credit score. Your current jumbo loan must not have incurred missed payments, and your debt-to-income ratio should stay low. Avoid taking out other loans or applying for a new credit card if you’re refinancing, and correct errors in your credit details to avoid hurting your score. 

Ensuring your creditworthiness before applying for a new refinancing scheme increases your chances of getting approved. Moreover, it helps you get more competitive rates and terms. 

Apply unless you’ve gathered enough information

Always think things through before switching. Don’t be eager to jump at the first enticing offer that comes your way. Build your knowledge about the market or consult with professionals to know what constitutes a good deal.  

More importantly, review and compare the rates and terms to identify the most favorable offer. Beware of phrases like introductory rates or promos, as you might pay more once these short-lived offers expire.    

Refinance just to consolidate or repay other debts

Some might consider a jumbo cash-out refinance to fund home renovations, consolidate debts, or pay other debts. Under this scheme, borrowers can take a portion of their equity, resulting in a higher loanable amount. However, note that you’re getting more money than you owe and will have to pay higher interest and tax.  

This option is attractive if your property’s value has increased or you’re investing in a commercial property. If neither applies to you, think twice before taking this route.  

Conclusion

Because of certain risks involved in refinancing, multiple factors need to be considered by a prospective borrower. Before making the switch, gather as much information as possible about the current market, compare lenders’ offers, and study the financial implications of revising your loan terms. 

Knowing the things to do and avoid will help you find the best credit product for your current situation and future goals. More than anything, you can lower the risks of defaulting and keep your dream home for good.