What are the Pros and Cons of Refinancing a Jumbo Mortgage?

Refinancing a jumbo mortgage can provide a homeowner with several advantages, including taking advantage of tax breaks and allowing him or her to save money on interest. In some cases, the homeowner may also benefit by refinancing into a traditional mortgage instead of keeping the jumbo loan. At the same time, this process has a few disadvantages as well, such as costing the homeowner money in closing costs and eating into the equity of the property.

One of the primary advantages of refinancing a jumbo mortgage is that the homeowner may be able to benefit from a tax break. The interest that is paid on a mortgage is tax-deductible in the United States, which can lessen the amount of money that a homeowner has to pay in taxes at the end of the year. Many times, homeowners could pursue refinancing a jumbo mortgage to make large purchases tax deductible when they otherwise would not be. For example, instead of purchasing an automobile with a traditional loan, the homeowner could refinance a home loan in order to deduct the interest on the purchase.

Another benefit of refinancing a jumbo mortgage is that the homeowner could potentially save money in interest. If the homeowner agreed to a mortgage when interest rates were high, he or she could be paying a significant amount of money in interest. By using one of the many refinance programs that are available, the individual may be able to cut the interest rate and the monthly payment if market interest rates are low.

By refinancing the loan, the homeowner could potentially get into a traditional mortgage instead of leaving it in the jumbo mortgage class. Jumbo mortgages traditionally have higher interest rates because they are riskier for lenders. If the homeowner has paid down a large portion of the principal balance, he or she could refinance the home loan into a regular loan and save some money.

One of the big drawbacks of refinancing a jumbo mortgage is that the homeowner could have to pay closing costs. Some mortgages require the homeowner to come with a large amount of cash to cover these closing costs. If this is the case, it could eliminate any savings that could be realized.

Many homeowners also make the mistake of using the money in a cash-out refinance to make unnecessary purchases with the equity in their homes. If this happens frequently enough, the homeowner will not be able to accumulate any equity in the home. This will result in the homeowner making payments much longer than he or she should have to.