The average 30-year fixed mortgage rate hit a 6-month high recently. Last week’s rates rose yet again, up 0.02% up to 3.24%. While that is the third consecutive week that rates have gone up, this rate movement is aligned with 2021 expert predictions and nearly 1% lower than pre-pandemic levels.
Those looking to buy a home will benefit from low rates, but will have to deal with the issue of rising home prices. Those looking to refinance an existing home to a lower rate, however, stand to benefit immensely from the current rate environment. This is especially true for those with larger jumbo loan amounts. Since monthly payments and interest are calculated off the loan balance, even a small decrease in rate can lead to a significant amount of savings.
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Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.
The Benefits to Refinancing a Jumbo Loan
Let’s say you bought a home for $1,000,000 with 10% down and took out a 30-year mortgage at 4.5% for the $900,000 you needed to borrow. If you’ve been paying the loan for three years you’d have a loan balance of roughly $855,000, according to the NextAdvisor mortgage calculator. By taking out a new jumbo 30-year refinance loan at 3.5% you would lower your monthly payment by $721 and save close to $83,000 in interest.
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When deciding whether or not to refinance, you should consider your break even point. In other words, when you take the closing costs associated with a refinance and divide it by your monthly savings, you will get the months it takes for you to recoup the cost of refinancing. It’s best to plan to stay in the home until you reach your break even point.
What Is a Jumbo Loan Refinance?
Your loan amount will determine whether your mortgage is classified as a jumbo loan. Loans that are within the dollar amounts set by the Federal Housing Finance Agency (FHFA) are classified as conforming loans, while loans exceeding these limits are viewed as jumbo loans. For a single family home, the limit is $548,250. In certain high cost of living areas, that number goes up to $822,375. However, the limits set by the FHFA vary based on a number of different factors such as state, county, and property type. Limits can also change over the years depending on things like cost of living and median housing prices.
Jumbo and conforming loans can both be used to purchase or refinance a home. However, since jumbo loans have higher dollar amounts and therefore are more risky to lenders in the event of a default, they tend to require more documentation and have higher closing costs. Jumbo loans also tend to be more strict when it comes to credit and income standards, offering less flexibility when it comes to things like delinquent credit, low credit scores, and employment gaps.
Disadvantages and Benefits to Refinancing a Jumbo Loan
By refinancing a jumbo loan, you are potentially lowering your interest rate and monthly payment. The monthly savings from refinancing could be used to help you with other financial goals. This can include building up an emergency fund, increasing retirement savings, or home improvements. The lower payments could free up monthly cash flow to pay towards the loan balance and speed up the payoff timeline. In the long run, you can save on total interest, too.
But the closing costs are based on a percentage of the total loan. This means a jumbo loan has jumbo closing costs, making it more expensive to perform a refinance than a conventional refinance. Higher closing costs equal a longer break-even period. To account for the riskier investment and complexity of a jumbo loan, rates are generally higher and approvals tend to be scrutinized much more closely by lenders.
There are pros and cons to any big financial decision. Here is a breakdown for a jumbo loan refinance:
Could lower your monthly payment
Accelerate your loan payoff
Save money on interest fees
Finance other goals with the monthly savings
Higher closing costs
Longer break-even point
Strict underwriting criteria
Strict lending requirements