Mortgage Refinance
Get the Best Rate on Your Jumbo Mortgage Refinance
Jumbo mortgages: Beyond the maximums
If you are in the market for a luxury home and need mortgage financing, a jumbo loan may be your best option. Jumbo loans exceed the lending limits set by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency.
For most of the country in 2019, the maximum conforming loan amount is $484,350, although there are higher limits up to $726,525 in some U.S. counties. These loan limits, also known as conforming loan limits, are adjusted yearly to reflect changes in the average prices of homes.
Jumbo loans may be referred to as nonconforming loans because they don’t fall under the guidelines set by Fannie Mae and Freddie Mac for loan approval. Qualifying requirements and interest rates vary widely by lender, making it important to understand how they work before you start to compare jumbo rate offers.
Jumbo mortgage rates vs. conforming mortgage rates
Jumbo rates had been significantly higher than conforming rates, especially during the housing crisis from 2007 to 2010. As the housing market improved, jumbo rates dropped, and — in some cases — may be slightly lower than conforming interest rates.
Part of the reason for lower rates on jumbo loans is stricter underwriting standards. Jumbo lenders generally require a lower debt-to-income (DTI) ratio of 45% and at least six to 18 months of mortgage payments in the bank, also known as payment reserves. According to a 2018 CoreLogic report, the average jumbo borrower’s credit score is 18 points higher than that of a conforming borrower.
Jumbo lenders also require extensive documentation of all income and assets, and may require more than one property appraisal. The extra verifications and stricter underwriting requirements make it less likely a jumbo borrower will default — and the reward for less risky borrowers is lower interest rates.
Factors that may affect jumbo mortgage rates
Having a high net worth, excellent credit scores and high earnings don’t necessarily guarantee you the lowest rate when it comes to jumbo lending. The best rates are offered to borrowers who can fully document their creditworthiness. For some borrowers, that may be too cumbersome.
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Type of income documentation
Jumbo borrowers very often have complex income tax returns, taking advantage of sophisticated business structures to reduce tax liability. It may be difficult to determine qualifying income, or the lender may require extensive documentation and explanations from accounting professionals.
Jumbo lenders often offer alternative options, such as providing business bank statements for 24 months rather than tax returns. This extra flexibility usually comes with a markup to the interest rate.
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Amount of down payment
How much you put down will have an impact on your interest rate with a jumbo loan. While some lenders may allow you to put down as little as 10%, others may require 20% or even 25% if you want the lowest rate they offer.
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Asset-only documentation
Some borrowers may not want to provide bank statements or tax returns for privacy or convenience reasons. Jumbo lenders can also offer asset-only options for high net-worth borrowers. This will increase the down payment requirement and increase the rate you pay on your mortgage.
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Interest-only payment option
You may prefer an interest-only option if you receive large lump-sum income payments and want to have the lowest payment possible. If you make large payments toward the principal, your payment will drop much faster than if you are on a fixed-rate payment schedule. This can be a good option if you are expecting a large financial windfall — your interest-only payment is based on the balance, so your payment will drop significantly if you pay down a big chunk of your loan balance.
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Property types
One of the benefits of jumbo loans versus conforming loans is the ability to finance a wider range of property types. Whether it’s a log home near a ski lodge or a high-rise condominium in a big city, jumbo loans have less restrictions on property type.
Like all the other factors listed here, that flexibility comes at a cost, usually in the form of a higher interest rate. That flexibility may come with an extra layer of costs when it’s time to order an appraisal — your lender may require a review appraisal, especially if your loan amount is over $1 million. The review is meant to double-check the work of the first appraisal. Sometimes the appraisers don’t agree on the value, or one may require additional information the other didn’t.
Steps to qualifying for your best rate on jumbo mortgages
There are many more ways to be approved for a jumbo loan than you’ll find for a conforming mortgage. However, to receive your lowest jumbo rate possible, you’ll want to follow these steps.
- Provide full documentation of your income: If you have a certified public accountant (CPA) who can provide your financial documents — profit and loss statements, tax returns, pay stubs and W-2s — with ease and is willing to respond to requests, you could get your best rate. Jumbo investors are committing to much larger loan amounts than conforming loan investors, so they stand to lose more if a jumbo loan defaults. To offer premium rates, they want as much documentation as possible to prove your ability to repay.
- Spruce up your credit score: If your scores are 740 or above, you’ll have a variety of low-rate jumbo lender options from which to choose. Once you drop below that, your choices will become more limited, you may be required to make a higher down payment and your rate will be higher. You may want to check your credit score before you apply, and keep credit card balances to a minimum. The little things make a big difference in your credit score, especially when it comes to getting your lowest interest rate.
- Make a bigger down payment: Jumbo investors tend to offer the lowest rates to borrowers who make bigger down payments. Usually, 20% is the preferred down payment amount, but a larger one may get you an even lower rate.
- Deposit a large sum of money into your bank: Institutional banks tend to offer rate incentives on jumbo loans if you have a significant amount of assets. You may get closing costs waived or a customized rate quote if you are willing to deposit or currently have a large sum of funds in a particular bank. They may also give you much more flexibility on documentation requirements if you carry a high net worth of investments, so check with your local banker to see what it offers you.
An important note about jumbo loan tax deductibility
Under the federal Tax Cuts and Jobs Act (TCJA), the mortgage interest tax deduction only applies to interest paid on $750,000 worth of mortgage debt. That’s a decrease of $250,000 from the limits prior to December 2017, so you may want to discuss tax strategies with an accounting professions if you plan to borrow more than $750,000.
The value of shopping around for jumbo loans
Because jumbo loans are a specialized loan type, not all lenders will offer competitive rates. Some may prefer to specialize in conforming loans, or may not have the net worth or capital requirements that banks have to offer you the lowest rates.
Getting the lowest rate on a jumbo loan can save you in the long run. The examples below show how much extra interest is paid on jumbo loans versus conforming loans.
Conforming Loan Comparison
| 300K LOAN | RATE | PAYMENT | TOTAL INTEREST |
|---|---|---|---|
| Loan A | 3.875% | $1,410.71 | $207,856.05 |
| Loan B | 4.25% | $1,475.82 | $231,295.08 |
| Difference | .375% | $65.11 | $23,439.03 |
Jumbo Loan Comparison
| 600K LOAN | RATE | PAYMENT | TOTAL INTEREST |
|---|---|---|---|
| Loan A | 3.5% | $2,694.27 | $369,936.53 |
| Loan B | 3.875% | $2,821.42 | $415,712.10 |
| Difference | .375% | $127.15 | $45,775.57 |
At the top of the page, you can shop for jumbo rates. Based on your creditworthiness, you could be matched with up to five different loan offers from lenders.
If you have a high net worth of investments and deposits with your local bank, it’s definitely worth discussing what terms they’d be willing to offer for your jumbo loan needs.
Because the difference between the cheapest and most expensive loan is greater for jumbo products, and because the larger loan amount increases the difference in payment, there is a greater opportunity to save by comparison shopping for a jumbo mortgage. Obtaining multiple quotes from competing jumbo mortgage lenders is an easy process with tools like LendingTree’s LoanExplorer, so there is no reason for consumers to overpay when they choose their jumbo financing.