Everything You Need to Know About Cash Out Refinancing a Jumbo Loan

Refinancing a jumbo loan can be a great way to lower your interest rate and monthly payments. But when you do a cash out refinance you’re also able to pull equity out of your home in cash. This extra money can be used to fund home improvements pay off high-interest debt, or cover other major expenses.

Cash out refinancing a jumbo loan isn’t for everyone though. There are stricter eligibility requirements, and you’ll end up with a higher loan balance. So before you jump in, make sure you understand how it works and weigh the pros and cons.

What is a Jumbo Loan?

Let’s start with the basics. Jumbo loans are mortgages that exceed the conforming loan limits set by Fannie Mae and Freddie Mac each year. For 2023 that limit is typically $726200 for single-family homes in most parts of the country. However, it can go up to $1,089,300 in certain high-cost areas like New York City or San Francisco.

So any mortgage over $726200 is usually considered a jumbo loan. The requirements for these jumbo mortgages are more stringent than for conforming loans under the limit. That’s because they aren’t guaranteed by Fannie and Freddie, so the lender takes on more risk.

When Does a Cash Out Refinance Make Sense?

With any refinance, you’ll want to make sure the costs are justified by the savings. Closing costs and upfront fees can range from 2% to 5% of the loan amount. On a $1 million jumbo loan, that could be $20,000 to $50,000!

So you don’t want to refinance unless you know you’ll recoup those expenses in interest savings over time. Generally, that means getting at least 0.5 to 1 percentage point knocked off your current rate.

Here are some of the top reasons homeowners choose to do a cash out refinance:

• Lower mortgage rate: As noted above, you can reduce your interest rate and monthly payments, which saves money over the life of the loan.

• Consolidate debt: You can pay off credit cards, personal loans, or other high-interest debt at a much lower interest rate. This can reduce your monthly debts and total interest costs.

• Home improvements: Cash out refinancing lets you access your home equity to fund renovations, repairs, or upgrades to your property.

• Major purchases: You can tap equity to buy a car, boat, or other large purchase without taking out a separate loan.

• Investment property: Investors can use cash out refinancing to purchase additional rental properties or fund repairs on existing ones.

• College costs: The cash can help pay for tuition, room and board, or other expenses for your child’s education.

No matter your reason, you want to make sure tapping home equity now aligns with your long-term financial goals. And remember, you’ll be paying interest on that money over the life of the new loan.

Cash Out Refinance Requirements for Jumbo Loans

Refinancing a jumbo loan has stricter criteria than conforming loans or even a rate-and-term jumbo refi where you don’t take cash out. Here are some common requirements to qualify for a cash out jumbo refinance:

• Credit score: Most lenders require at least a 660 FICO score, though some may accept 640 or higher. The better your credit, the lower interest rate you can qualify for.

• Loan-to-value (LTV) ratio: You’ll likely need at least 20% equity, meaning an 80% LTV or lower. Some lenders may allow up to 85% LTV. The more equity you have, the better.

• Debt-to-income ratio: Your total monthly debt payments, including the new mortgage, usually cannot exceed 43% of your gross monthly income. The lower this ratio, the better.

• Loan amount and home value: Loan limits vary by lender but are generally capped at $2 million. Home value can’t exceed $3 million. Jumbo loan sizes tend to be between $750,000 and $2 million.

• Property type: Most lenders require a single-family home, townhouse, or condo. Investment properties may be limited to 1-4 unit buildings. Unique properties often don’t qualify.

• Employment and income: Expect to provide two years of W-2s, tax returns, and a month or more of recent paystubs. Self-employed borrowers need two years of business tax returns.

• Assets and reserves: Lenders may require 3-12 months of mortgage payments in liquid reserves that can be documented, such as checking/savings accounts or retirement funds.

Always check with multiple lenders on their specific requirements, as they can vary. Having a strong credit profile and financial profile will help you get approved and land the best interest rate.

How Much Cash Can You Take Out with a Refinance?

When you refinance an existing mortgage, the new loan amount can be either equal to or higher than your current balance. Here are the main options:

Rate-and-term refinance: The new principal is the same or slightly higher than your current principal due to closing costs getting rolled in. You don’t take out any equity.

Cash out refinance: The new loan amount is higher than your current balance by the amount of cash you want to take out. The extra funds are wired to you at closing.

Most lenders limit the maximum cash out amount to 80% combined loan-to-value (CLTV) ratio. That means if your home is worth $1 million, the most you could borrow is $800,000. So you could cash out up to $200,000 on a $600,000 balance.

Always leave yourself some equity cushion, as home values can fluctuate. And remember, banks have final say on how much they’ll lend based on your financial profile and debt-to-income ratio. Shop around to see which lender will give you the highest cash out amount.

Cash Out Refinance Rates and Closing Costs

Interest rates – Jumbo loan rates are similar to conforming loans, though usually slightly higher. The difference is small when credit scores are good and LTV ratios are lower. For a cash out refinance, expect to pay anywhere from 0.125% to 0.5% more compared to a rate-and-term jumbo refinance.

Closing costs – You’ll pay the usual origination charges, appraisal fees, title fees, taxes, and prepaid items that come with any mortgage refinance. Just be aware that because jumbo loans are higher balances, certain percentage-based fees will be higher.

Prepayment penalties – Some jumbo mortgages, especially for investment properties, come with prepayment penalties if you refinance within the first few years. Make sure you check whether your existing loan has a prepayment penalty that would impact refinancing costs.

Shopping around to compare offers from multiple lenders is crucial. Even small differences in rates and fees can really add up over the long run. Working with an experienced loan officer can help optimize this process as well.

Pros and Cons of Cash Out Refinancing a Jumbo Mortgage

Here are some of the key advantages and disadvantages to weigh when considering tapping home equity via a cash out refinance:

Pros

• Access cash for major expenses or purchases
• Pay off higher interest rate debts
• Lower monthly mortgage payment
• Consolidate debts into one payment
• Deduct mortgage interest on taxes
• Potentially remove PMI

Cons

• Upfront costs and fees
• Higher loan balance and total interest paid
• Higher monthly mortgage payment
• Increased risk if home values decline
• Difficult to qualify with stringent requirements
• Potential prepayment penalties

Doing a break even analysis and calculating your breakeven point can give you an idea of how long it will take to recoup closing costs through savings. Weigh the pros and cons based on your individual situation.

Alternatives to Cash Out Refinancing

If you’ve determined refinancing isn’t the best option right now, here are a few alternatives for accessing home equity:

• HELOC – A home equity line of credit offers flexibility, draws funds as needed, and may have lower upfront costs. The interest rate is variable however.

• Home Equity Loan – These close-end loans let you borrow a lump sum at a fixed rate and term. Payments are amortized so you pay down principal.

• Home Equity Loan – You can take out a lower rate personal loan using home equity as collateral without tapping into the equity itself. This avoids closing costs.

• Using Cash or Selling Assets – You may opt to use existing savings, investment funds, or proceeds from selling other assets like stocks instead of tapping home equity.

• Downsizing – Some homeowners choose to downsize to a lower priced home and pocket the difference, rather