Mortgage refinancing can provide homeowners with options to consolidate debt, obtain a lower interest rate, and tap equity to pay for big-ticket expenses. Whatever the reason for refinancing, homeowners who have jumbo loans—those intended to finance luxury homes and properties—may face a demanding process because there’s more money at stake.
Jumbo loans are complicated mortgages, but these five tips should make the process easier and less stressful.
Review your credit score
Lenders are interested in whether applicants have good credit, so expect a credit check when you refinance. If you want the best interest rates from lenders, work to increase your FICO score well beyond the 700 mark. Reviewing your credit report gives you an opportunity to check for any errors and have them corrected before you apply for refinancing.
Check income and assets
Take time to document your income sources and the amount of money you have in reserves. Mortgage lenders will want to see that you’re able to carry higher monthly mortgage payments. They check more than just W-2s and liquid assets. For jumbo loans, lenders will review two years of tax returns and if their applicants have savings to cover several months’ worth of principal, interest, taxes, and insurance.
Understand your debt
Having debt does not disqualify you from refinancing a jumbo loan but understanding your debt-to-income ratio can give you a better idea of whether you’ll be able to qualify for the loan. The ratio is calculated by determining how much of your income goes to mortgages, student and vehicle loans, and servicing credit card and other debt. Examining debt isn’t about looking at past expenditures alone. It’s also important to calculate future expenses. Are you paying for a child in college? Are you expecting to increase the size of your family? These kinds of life changes may impact your ability to service your new jumbo mortgage.
Know your equity
The loan-to-value ratio is the amount owed on your home compared to the home’s value, and it can affect your ability to refinance. You’ll need at least 20 percent equity in your home to qualify for a new jumbo mortgage. You may still refinance with a smaller percentage of equity, but a higher interest rate could be applied by the lender. Having less equity could require a greater FICO score.
There are many refinancing options, so it’s always good to compare your options before you select your final loan. Look into the advantages and disadvantages of fixed-rate versus adjustable-rate jumbo mortgages. Homeowners should investigate factors that are not part of the core loan rates, such as the fees lenders charge if you pay off the loan before term.
Lenders want to make jumbo loans. You can work with them to refinance your mortgage by providing accurate documentation. Taking time now to be fully prepared for the new loan will not only save you money but give you the flexibility to plan for future expenses.