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When you want to buy a higher-priced property that surpasses conforming loan limits, a jumbo mortgage loan comes in handy. This form of financing can allow you to borrow a lot more—sometimes $2 million or higher—to acquire a costly residence.
But jumbo loans can often come with higher interest rates than conforming loans. For these and other reasons, it can make sense to refinance your jumbo loan and capitalize on a lower rate if you qualify.
But you aren’t necessarily limited to refinancing to a new jumbo loan. You can also refi to a conventional conforming loan if the conditions are right.
Explore worthy reasons to refinance your jumbo loan to a conforming mortgage, the benefits and disadvantages of refinancing a jumbo loan, the ideal time to pull the trigger on a refi, and the steps involved with this process.
Refinancing to a conventional loan: Is it allowed?
The good news is that, yes, you are permitted to refinance a jumbo loan to a conventional conforming loan if you can find a willing lender and if your mortgage balance has dropped to a specific threshold. This has to do with the conforming loan limit in your area.
The conforming loan limit for 2024 in most areas is $766,550 for a single-family home, which represents a limit increase of more than $40,000 from 2023. In high-cost areas, the new conforming loan limit is actually higher: $1,149,825.
These limits are set by the Federal Housing Finance Agency (FHFA) and vary based on county of residence. Conventional loans that conform to these limits are bought by Freddie Mac and Fannie Mae, two government-sponsored enterprises, who serve to limit a lender’s risk in case you default.
Good reasons to refinance your jumbo loan
If your loan balance owed is now less than $766,550 (in most areas) or under $1,149,825 in high-cost areas, you might want to refinance your jumbo loan to a conventional conforming loan.
That’s because doing so could save big money on interest if the new conventional loan has a lower interest rate. Plus, when you have a jumbo loan it can be easier to refi to a conventional loan than to another jumbo loan, as more lenders are willing to do so.
Consider that, at the time of this writing, the average fixed interest rate for a conventional 30-year refinance loan was 6.749% versus 7.275% for a 30-year fixed-rate jumbo refi loan.
Alternatively, you could refinance your jumbo loan to a:
- New jumbo mortgage, which can be worthwhile if you can secure a lower fixed rate and seek a lower monthly payment, or if you currently have an adjustable-rate mortgage (ARM) jumbo and desire a more reliable fixed rate.
- New jumbo or conventional cash-out refinance loan if you want to pull equity from your home to pay for things like home improvements, debt consolidation, medical bills, etc.
» MORE: See today’s refinance rates
Pros and cons of a jumbo loan refi
Let’s say you bought a $1 million home five years ago via a jumbo mortgage loan at a fixed rate of 8.00%, for which you put down 20%. Your current balance today is $700,000, and your monthly principal and interest payment is $5,870.
If you refinance your jumbo to a conventional conforming loan at a 6.667% fixed rate, your new monthly payment would only be about $4,502. The downside is that you would be resetting your term and adding another five years of payments onto your repayment schedule, but you’d save a whopping $1,368 a month.
“The recent drop in mortgage rates provides a compelling reason to consider refinancing from a jumbo loan to a conforming loan,” says Rose Krieger, a loan specialist with Churchill Mortgage. “Refinancing to a lower rate can result in a reduced monthly payment, as you will be paying a smaller amount in total interest.”
It’s also easier to refi to a conforming loan than another jumbo loan, “as you’ll have access to more participating lenders and loan products via this route,” says Dennis Shishikov, adjunct professor of economics at City University of New York.
But keep in mind you’ll have to pay closing costs when you refinance a jumbo mortgage. This is true whether you refi to a new conforming loan or another jumbo loan, but you could pay a bit more than normal – possibly between 3% and 6% of the loan amount versus 2% to 5% for most other mortgage refis.
“Also, you may be forced to pay for private mortgage insurance if your earned equity is less than 20% when refinancing,” Shirshikov adds.
To make a more informed decision, request an itemized worksheet from your chosen lender before proceeding with a jumbo refinance.
The best time to refinance your jumbo loan
As explained earlier, the ideal time to ponder a jumbo refi to a conforming loan is when your loan balance falls within the conforming loan limits in your area.
“Also, if the prevailing conforming interest rates for refinancing are lower than your current rate, the time could be ripe,” Krieger continues.
However, you need to ensure you can cover the expenses involved with refinancing, including the closing costs involved. Additionally, you should have good credit—ideally a credit score of 700 or higher—sufficient cash reserves saved, and a debt-to-income ratio of no higher than 45%.
You may want to postpone applying for a refinance if you need to save more or boost your credit score a bit higher.
What’s involved with refinancing your jumbo loan
Feel confident that now’s the right time to refinance your jumbo loan to a conventional conforming mortgage? Have you crunched the numbers and determined that you’re within your area’s conforming loan limit? Prepare to:
- Review your credit. Read your three free credit reports and contest any inaccuracies or errors you notice. Check your credit score through your bank or credit card, too; if it’s lower than desired, work to raise your score by paying your bills on time and in full, not opening up any new accounts or credit lines, not closing any existing credit accounts, and not exceeding your credit limits.
- Gather the necessary paperwork. Collect key documents like recent tax returns, paycheck stubs, and financial statements in case your lender requests them, and prepare to furnish private information like your Social Security number.
- Shop around for a new refinance loan among several different lenders. Request rate quotes and loan offers, and compare these offers and the total financing costs carefully to choose the best option.
- Submit a refinance application along with requested documents.
- Pay for a home appraisal if the lender requires it.
- Await an underwriting decision.
- Close on the refinance loan, if approved, and sign all the paperwork and legal documents.
“Typically, the refinance process is faster than a standard jumbo purchase mortgage, contingent on your cooperation and the appraisal turnaround time,” Krieger notes.
The bottom line
Consider the pros and cons of refinancing thoroughly and evaluate if the advantages of refinancing outweigh the expenses and effort involved. Also, think about how much longer you plan to remain in your home before selling and moving; after all, you want to be able to recoup what you paid in closing costs.