For homeowners considering refinancing, understanding the key differences between a jumbo cash-out refinance and a conventional refinance is essential, particularly if you own a high-value property. Refinancing your mortgage can be a powerful financial tool, whether you’re looking to lower monthly payments, access home equity, or consolidate debt. But choosing between a jumbo cash-out refinance and a conventional refinance depends on factors like your loan amount, equity, credit score, and financial goals.
In this post, we’ll compare jumbo cash-out refinancing and conventional refinancing, focusing on the advantages of each option and helping luxury homeowners decide which route best suits their needs.
What Is a Jumbo Cash-Out Refinance?
A jumbo cash-out refinance is designed for homeowners with mortgage balances that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). As of 2024, the conforming loan limit for a single-family home is $726,200 in most parts of the U.S., but in high-cost areas, this limit can go up to $1,089,300. Any mortgage that exceeds these limits is considered a jumbo loan.
With a jumbo cash-out refinance, homeowners can refinance their mortgage and take out cash based on the equity they’ve built in their home. This type of refinancing is best suited for luxury homeowners or individuals with high-value properties who want to access substantial cash for home improvements, debt consolidation, or investments.
What Is a Conventional Cash-Out Refinance?
A conventional cash-out refinance is a loan that replaces your existing mortgage with a new one, allowing you to borrow more than you owe and receive the difference in cash. This option is available for mortgages within the conforming loan limits set by the FHFA. Unlike a jumbo loan, a conventional loan adheres to the loan limits of Fannie Mae and Freddie Mac, making it a more standard choice for the majority of homeowners.
Conventional cash-out refinances typically come with lower interest rates than jumbo loans and more lenient qualification criteria, making them a popular choice for homeowners with smaller mortgage balances and properties that fall within the conforming loan limits.
Key Differences Between Jumbo Cash-Out Refinance and Conventional Refinancing
There are several important differences between jumbo cash-out refinancing and conventional refinancing, particularly in terms of loan limits, eligibility requirements, interest rates, and fees. Let’s break down these differences:
1. Loan Limits
The most significant difference between jumbo and conventional cash-out refinances is the loan limit.
- Jumbo Cash-Out Refinance: A jumbo loan exceeds the conforming loan limits set by the FHFA, meaning you can refinance for mortgage amounts above $726,200 (or $1,089,300 in high-cost areas). This option is ideal for homeowners with high-value properties who need to access large amounts of cash.
- Conventional Cash-Out Refinance: With a conventional loan, the loan amount must be within the conforming loan limits, meaning you cannot refinance for more than $726,200 in most areas. Conventional loans are typically more suited for average homeowners or those with smaller mortgage balances.
If you have a luxury property or a high-value home that exceeds these limits, you’ll need to opt for a jumbo cash-out refinance.
2. Credit Score Requirements
Credit score requirements also differ between jumbo loans and conventional loans.
- Jumbo Cash-Out Refinance: Jumbo loans generally require a higher credit score due to the larger loan amounts and increased risk for lenders. Most lenders will require a credit score of at least 700, though some may have stricter requirements, especially for larger loan amounts.
- Conventional Cash-Out Refinance: Conventional loans typically have more lenient credit score requirements, with most lenders requiring a minimum credit score of 620-640. This makes conventional refinances more accessible for homeowners with lower credit scores.
If your credit score is on the lower side, you may find it easier to qualify for a conventional cash-out refinance. However, if you have a high credit score and a high-value home, a jumbo cash-out refinance might be the best option.
3. Loan-to-Value (LTV) Ratios
The loan-to-value (LTV) ratio is another critical difference between jumbo and conventional loans. This ratio refers to the percentage of your home’s value that you can borrow.
- Jumbo Cash-Out Refinance: Lenders offering jumbo loans generally allow you to borrow up to 80% of your home’s appraised value. However, the LTV ratio may vary depending on your credit score, income, and the size of the loan.
- Conventional Cash-Out Refinance: Conventional lenders also typically allow you to borrow up to 80% of your home’s appraised value. However, some lenders may have more flexibility and allow higher LTV ratios for certain borrowers.
Both jumbo and conventional loans have similar LTV limits, but jumbo lenders may have stricter guidelines due to the higher risk associated with larger loan amounts.
4. Interest Rates
Interest rates are another important factor to consider when comparing jumbo and conventional loans. Jumbo loans typically have higher interest rates than conventional loans due to the larger loan amounts and increased risk for lenders.
- Jumbo Cash-Out Refinance: Because jumbo loans exceed the limits set by Fannie Mae and Freddie Mac, they are not backed by government-sponsored entities, which increases the lender’s risk. As a result, jumbo loans often come with higher interest rates. However, borrowers with excellent credit scores and financial profiles can still secure competitive rates.
- Conventional Cash-Out Refinance: Conventional loans, which fall within the conforming loan limits, usually have lower interest rates than jumbo loans. This is because they are backed by Fannie Mae and Freddie Mac, reducing the lender’s risk.
For homeowners looking to minimize their interest rate, a conventional cash-out refinance might be the more cost-effective option. However, if you need to borrow more than the conforming loan limits, a jumbo loan is your best bet.
5. Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is required for conventional loans with an LTV ratio of more than 80%, meaning that if you borrow more than 80% of your home’s value, you’ll need to pay for PMI. PMI adds to your monthly mortgage payment and protects the lender in case you default on the loan.
- Jumbo Cash-Out Refinance: One of the advantages of jumbo loans is that they typically do not require PMI, even if your LTV exceeds 80%. This is because jumbo loans have stricter credit and income requirements, reducing the lender’s risk. For high-value homeowners, this can result in significant savings.
- Conventional Cash-Out Refinance: With conventional loans, PMI is required if your LTV exceeds 80%. However, once you’ve built up 20% equity in your home, you can request to have PMI removed, which will lower your monthly payments.
For homeowners who want to avoid the added cost of PMI, a jumbo cash-out refinance might be the better option, particularly if you’re borrowing more than 80% of your home’s value.
6. Closing Costs
Closing costs for both jumbo and conventional loans include fees for the loan application, appraisal, title search, and more. However, closing costs for jumbo loans are typically higher due to the larger loan amounts involved.
- Jumbo Cash-Out Refinance: Expect higher closing costs with a jumbo loan, especially if you’re refinancing a high-value property. These costs may include higher appraisal fees, lender fees, and other administrative costs associated with larger loan amounts.
- Conventional Cash-Out Refinance: Closing costs for conventional loans tend to be lower because the loan amounts are smaller and the risk for lenders is reduced.
If you’re looking to minimize upfront costs, a conventional refinance may be the more affordable option. However, for luxury homeowners who need to borrow large amounts, the higher closing costs of a jumbo refinance may be worth the investment.
Which Option is Best for Luxury Homeowners?
For homeowners with luxury or high-value properties, the decision between a jumbo cash-out refinance and a conventional refinance comes down to the size of the loan, your credit score, and your financial goals.
- If you own a high-value home that exceeds the conforming loan limits, a jumbo cash-out refinance is your best option. It allows you to borrow large amounts of cash, access up to 80% of your home’s value, and avoid PMI.
- If your mortgage falls within the conforming loan limits and you’re looking for lower interest rates and lower closing costs, a conventional cash-out refinance might be the better choice.
Final Thoughts
Choosing between a jumbo cash-out refinance and a conventional refinance depends on your home’s value, your financial situation, and your long-term goals. For high-net-worth individuals with luxury homes, a jumbo cash-out refinance offers the opportunity to access substantial cash while avoiding the costs of PMI. However, if your mortgage falls within the conforming loan limits, a conventional refinance may provide lower interest rates and reduced upfront costs.
Consulting with a mortgage professional can help you determine which option is best for your specific needs and ensure that you secure the most favorable terms for your refinancing goals.