Does it make sense to buy down my DSCR Refi Rate?

Question

I’m refinancing a 5 unit building, this is my first DSCR Refi and I’m looking over the buy down options. In my specific situation, 7500$ buys down .75% essentially taking 100$ a month of my P and I payment. This loan would be pulling out 250,000$, 30 year fixed with a 5 year pre payment penalty. What’s the best way to look at this? To me it doesn’t make sense to mess with it, I wouldn’t see the return of that 7500$ until year 6 but I could be looking at it all wrong. I’m also now interested to hear what situations this does make sense, probably makes a bigger difference at larger loan amounts? Thank You.

Stacy Raskin · Answer

If the rate buydown gets you $100 back monthly and it costs $7,500 then you won't see the breakeven until month 76 or as you mentioned into year 7.

It's worth thinking about the total cost of all of you fees since you will have to most likely pay something similar to refinance. Will they most likely be more or less than $7,500? Also, worth thinking about when you might want to sell.

If you have a 5 year prepayment penalty then it sounds like you won't be refinancing until after year 5 unless you are ok with paying the penalty.

Buying down the rate or paying discount points can make sense depending on your monthly savings and how long you will hold on to the property. You want the math in your favor and for the rate buydown to be beneficial for your real estate investment plans.

Happy to connect to discuss further.

Kyle Hendricks · Answer

I would keep it simple. If you think there could be a refinance opportunity, you could sell, 1031, etc. before year 7, it doesn't make sense. If you don't plan on refinancing or doing anything before then and you don't think you could get a better return on the $7,500 somewhere else then it could make sense.

I tend to think you can typically get better returns on that money elsewhere. Often putting it into the property, making a better tenant experience, reducing turnover and commanding higher rents which will typically go a lot farther than $100 a month.

Frank Pyle · Answer

Luke, I think you’re looking at it the right way and getting a consistent answer. If you’re spending $7,500 to save about $100 a month, that 6-plus year breakeven is the first thing I’d look at. Then I’d ask two questions: how long do you realistically see yourself keeping this exact loan, and what’s your view on rates. If you think you’ll refi in a few years or believe rates are likely to keep drifting down, it’s hard to justify paying that much upfront for a buydown you may not fully use. Where it starts to make more sense is when the breakeven falls inside your realistic hold period and you don’t expect much more rate improvement, or when the lower rate is the difference between the deal penciling out on DSCR and not.

Does it make sense to buy down my DSCR Refi Rate?

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