Thinking About Refinancing Your Home Loan?

ENLARGE

Illustration: Chris Gash

The bigger the loan, the greater the fall.

Low interest rates have triggered a flurry of refinancing this spring, and borrowers with higher balances are seeing their monthly payments decline the most.

Refinance applications in 2016 hit their highest levels for the week ending on Feb. 12, when the average loan amount was $316,000, according to the Mortgage Bankers Association. That average balance was the highest in the 26-year history of the MBA’s weekly lender surveys.

With higher loan amounts, even a small reduction in the interest rate can add up to substantial savings to a monthly payment, says Joel Kan, MBA’s associate vice president, industry surveys and forecasting.

On the week ending June 3, average interest rates were 3.79% for a 30-year, fixed-rate jumbo mortgage and 2.94% for a five-year, adjustable-rate jumbo mortgage, according to HSH.com, a website that tracks mortgage rates. That’s slightly below last year’s low of 3.82% on April 10, 2015. Overall, rates remain attractive despite a Federal Reserve quarter-point hike on short-term rates in December, widely expected to push up mortgage rates.

Even just a quarter-point rate drop on a $760,000 loan amount can save a borrower as much as $100 on monthly payments, says Kasey J. Marty, executive vice president of Chicago-based Guaranteed Rate. In the first four months of 2016, Guaranteed Rate saw a 20% rise in its non-government-backed mortgage volume, about half being refinances, he adds.

Adding to the benefit for bigger borrowers, most closing costs, such as lender origination fees, appraisals and even title charges, don’t increase exponentially with loan size, says David Steckel, lending products and pricing executive for Bank of America. BAC -1.66 %

When closing costs are rolled into the loan amount, borrowers get instant savings, but if not, they should follow the standard advice and calculate how long they plan to stay in the house versus time to recoup closing costs, he adds.

Since many jumbo borrowers refinanced last year, one might wonder who was left to refinance. But there are many scenarios where a jumbo borrower might not have been ready then, says Bob Walters, chief economist at Quicken Loans.

“The economy has been getting better, so some fortunes have improved and bonuses are higher,” he says. Thus, some people have better credit scores and a lower debt-to-income ratio—lenders typically look for 43% or less to meet federal guidelines—than a year ago, Mr. Walters says.

Also, a busy buying season this spring has tightened inventory in some places, sharply driving up home prices. Because of that, some borrowers now qualify for more financing, especially those who want a cash-out refinance to fund home improvements or other expenses, Mr. Kan says. The median price of existing, single-family homes increased in 154 of 178 U.S. metro areas in the first quarter of 2016 compared with a year before, according to the National Association of Realtors. Of these metro areas, the average price increase was 6.6%. ( News Corp, NWSA -0.93 % which owns The Wall Street Journal, also owns Realtor.com, the listing website of the National Association of Realtors.)

It is impossible to predict how long rates will stay this low, but borrowers are unlikely to save more by waiting, says Keith Gumbinger, vice president at HSH.com, a mortgage-information website. The Fed is expected to raise short-term rates at some point this year, which is likely to spur lenders to follow suit on mortgage rates, so anyone postponing a refinance should watch rates closely, he adds.

Here are a few more tips when considering whether to refinance a jumbo mortgage:

• Shorter loan term. Borrowers well into their 30-year, fixed rate mortgage who qualify for a lower rate may want to consider refinancing to a 15- or 20-year term, Mr. Steckel says. They won’t see lower payments but will save money over the life of the loan due to a shorter amortization period, he adds.

• Close relationship. Some financial institutions offer discounts on closing costs or a lower rate to borrowers with other holdings, Mr. Steckel says. For example, Bank of America subtracts $600 off closing costs for its Preferred Rewards customers and gives rate reductions to customers who have or transfer $250,000 in balances.

• Don’t forget taxes. In some states and localities, closing costs may be much higher due to mortgage transfer or other property taxes, Mr. Marty says. For example in New York City, the “mansion tax” for loans of $1 million or above can come into play if one ups the loan amount for a cash-out refinance. Also in New York state, transfer taxes may have to be paid again if switching lenders and the original lender refuses to reassign the mortgage.