Strategy
Buying Down the Rate on a DSCR Loan (Points and Break-Even)
On a DSCR loan you can pay discount points upfront to lower the rate. Because rentals are usually long holds, a buydown can pay off, but only past a break-even point. Here is how to run that math.
A rate buydown is a simple trade: pay money now to lower your rate for the life of the loan. On a DSCR loan it has a second benefit beyond interest savings, because a lower payment also raises your DSCR and can rescue a marginal file.
How a buydown works
You pay discount points at closing. One point equals one percent of the loan amount, and each point typically lowers the rate by a set increment. The lower rate means a lower monthly payment for as long as you hold the loan. Because the payment is the denominator of your ratio, buying down the rate also lifts your DSCR, which is why a buydown can push a borderline deal over the line. See how to calculate DSCR.
The break-even is everything
The buydown pays off only if you hold long enough for the monthly savings to repay the upfront cost. The math:
- Find the upfront cost. Points paid times the loan amount.
- Find the monthly savings. The old payment minus the new payment.
- Divide. Upfront cost divided by monthly savings gives the number of months to break even. Hold past that, and the buydown is pure savings.
On a long-term rental held for years, a buydown often clears its break-even comfortably. On a property you may sell or refinance soon, the upfront cost is usually wasted, and the prepayment question matters too. See can you refinance a DSCR loan and prepayment penalties.
How to decide
Estimate your real hold period, then compare the no-points payment against the bought-down payment on the DSCR calculator and find the break-even. If you also need the lower payment to clear the ratio, the buydown does double duty. Confirm your standing with the pre-qualifier.