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Ask a Super Jumbo Loan expert: Refinancing a super jumbo loan

Q: I understand lenders charge lower rates for “conforming” mortgages than they do for “jumbo” mortgages. When are mortgages considered super jumbo? And is it a good idea to refinance an old super 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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