Living large? Get the best rate on your jumbo mortgage refinance

If you buy apparel from "big and tall" clothing stores, you're used to paying more and having less to choose from. "Regular guys," on the other hand, benefit from a wider selection of products and more competition between retailers.

Jumbo mortgage refinancing is the same way -- a jumbo loan is harder to find and more expensive than smaller Fannie Mae, Freddie Mac or FHA loans.

How are jumbo mortgages different?

1. They're bigger: Jumbo (or nonconforming) mortgages are those with balances that exceed the loan amount limits set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Those maximums are set by Congress and based on home prices in your area. The highest conforming loan amount allowed is $1,149,825.
2. They're harder to get: Because they cannot be sold through the GSEs, jumbo mortgages are bought by groups of investors who create their own sets of guidelines. Or, these mortgages are retained by the mortgage lenders that originate them. Todd Huettner of Huettner Capital says, "Most jumbo loan guidelines start with conforming guidelines. They then raise the maximum loan amount allowed and tighten up everywhere else." Applicants need higher credit scores, more equity, lower debt-to-income ratios and more assets to get approved for jumbo loans.
3. They cost more: Jumbo mortgages are generally more expensive than conforming mortgages, and the market for them is highly fragmented. Jumbo lenders participate in the market to varying degrees, and may or may not look to compete on price. As such, rates on jumbo loans can vary between lenders by .5 percent or more. That means it's even more important to shop for the best mortgage rates and terms.

Where do you find jumbo refinance mortgages?

Jumbo refinance mortgages, like conforming mortgages, are sold by banks, credit unions, mortgage brokers and other companies. However, many lenders do not deal in them or impose very restrictive loan-to-value, credit score and property requirements. That's what makes finding jumbo or super-jumbo financing so much harder than getting a GSE refinance.

Here are three places to find jumbo mortgages:

1. The Internet: Internet companies with excellent reputations list licensed mortgage lenders and refinance rates. It's a great starting point for comparing mortgage rates. You can also request personalized mortgage rate quotes from participating licensed and reputable lenders.
2. Mortgage brokers: Mortgage brokers have access to many programs and can do a lot of the legwork for you. A good broker not only knows where the programs are, but also can tell you which lenders offer the best refinance rates and are most likely to approve your application. Huettner says, "While your loan may not qualify with one lender, it could be fine with another. Jumbo loans are much more difficult to close than traditional loans. Because jumbo loan program guidelines vary more than conforming loans, it is often the little details that rear their ugly head and cause problems." Work with a jumbo mortgage specialist to dodge pitfalls.
3. Local real estate agents: Local agents who list a lot of high-end homes know who finances them and who does a good job. Understand, though, that a real estate agent's priority is that the mortgage gets approved and closed quickly. They are less concerned about who offers the best refinance rates.

Tracking down the lowest jumbo mortgage rates

Everyone wants the best mortgage rates, but shopping wisely is even more important for homeowners with jumbo mortgages. When your home loan is large, even a small difference in the mortgage rate can have a big impact on your wallet.

For example, the payment on a $200,000 mortgage at 5.5 percent is only $155 more than it is at 5 percent. On the other hand, the difference between a 5 percent and 5.5 percent rate on a $2,000,000 loan is $620 a month -- nearly $50,000 in interest cost over five years.

Shopping around is one way to lower your refinance rate. Here are three more:

1. Test drive a hybrid: Hybrid ARMs feature rates fixed for three, five, seven or 10 years, and are substantially discounted by lenders. When fixed-rate loans are at 4.5 percent, the 5/1 hybrid ARM rate may be 2.75 percent.
2. Accept a penalty: In exchange for your promise not to repay your loan within an agreed-upon period of time (usually two to five years), your lender reduces the interest rate. The penalty kicks in if you pay the loan off earlier than agreed. "Soft" penalties apply only if you refinance early. "Hard" penalties apply if you sell or refinance.
3. Self-improvement: While not a standard practice in jumbo financing, many lenders do add some risk-based surcharges to their loan fees. Improving your credit score by a few points or bringing in cash to lower your loan-to-value could save you thousands. Ask your lender.

It's true that homeowners with jumbo mortgages do face greater challenges finding and closing refinance mortgages. Fortunately, the rewards are greater as well.

This article was revised by Keith Gumbinger.