Ask
an expert: Refinancing a jumbo loan
Q: I understand lenders charge lower rates for
“conforming?mortgages than they do for “jumbo?
mortgages. When are mortgages considered jumbo? And is it a good
idea to refinance an old jumbo loan if it would now qualify as
conforming?
A: A mortgage is considered jumbo when it exceeds the
conforming limit set by Fannie Mae and Freddie Mac, the
federally chartered companies that provide funding to retail
mortgage lenders. The limit is adjusted annually based on
average house prices. For 2006, it’s been raised to $417,000
for single-family homes in the continental U.S. (The limit is 50
percent higher in Alaska, Hawaii, Guam and the U.S. Virgin
Islands.) If the increase has caused your loan to now qualify as
conforming, you may indeed benefit from refinancing.
This is because mortgages over the conforming limit carry a
slightly higher rate than conforming loans. For a 30-year
fixed-rate mortgage, you would most likely be paying about
one-eighth to one-quarter of a percent more, though in some
circumstances the difference may be greater. The reason for this
higher rate is that jumbo mortgages carry more risk to the
lender and usually involve extra underwriting requirements, and
these costs are passed along to the homeowner.
The conforming limit for 2006 is much higher than last
year’s limit of $359,650. In fact, it’s a 16 percent
increase over 2005, the largest-ever jump in a single year. This
creates a refinancing opportunity that can save some homeowners
a lot of money.
Here’s an example: Let’s say you took out a $400,000
fixed-rate mortgage at 6% when a loan of that amount was
considered a jumbo. If you refinance today, your mortgage would
now be well under the conforming limit, and you would be able to
take advantage of the lower rate. For a 30-year fixed rate
mortgage, lowering your rate to 5.75% works out to almost $64
every month; reducing it by half a percent would save over $125
a month.
Remember that refinancing involves costs of its own, and
incurring these costs for a very small reduction in the interest
rate may not be worth it. For some borrowers, however,
refinancing from a jumbo to a conforming mortgage can save
thousands of dollars over the long term.
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