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Cash-in refinancing tames Jumbo mortgages to conforming

Jumbo mortgages, also called nonconforming loans, exceed $625,500 in high-cost areas like New York. Unlike conforming mortgages, they do not meet specific guidelines of Fannie Mae and Freddie Mac, which repurchase loans and resell them to investors. Because lenders assume more risk, interest rates for nonconforming loans are higher than for conforming.

These days the spread between conventional and nonconventional is 0.5 percentage points, on average, according to data from HSH.com, though if the jumbo loan was taken out during the financial crisis of 2008, it could have been up to 1.8 percentage points more.

To refinance out of a jumbo loan, most borrowers will have to put in extra money -- sometimes $100,000 or more -- to decrease the balance to below $625,500, or $417,000 in other parts of the country. Some, though, may see this as a sound investment.

Cash-in refinancing has remained popular as homeowners work to cut their debt levels. Some 23 percent of homeowners refinancing in the second quarter decreased their mortgage balances, according to Freddie Mac; in the fourth quarter of last year it was 47 percent. The agency provides a guide for consumers on its Web site.

Sheila Walker Hartwell, the owner of Hartwell Planning, a financial planner based in Manhattan, says homeowners with a good financial foundation could greatly benefit by moving to a conventional mortgage from a jumbo. She provided one scenario in which a couple pays in $75,000 when they refinance a $700,000 mortgage, and save at least $5,900 a year on interest based on a 0.33 percentage point reduction in their interest rate. They would need to earn almost 7.5 percent a year on that money to net the same amount from savings or investments, she said.


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