Paying points to buy down a DSCR rate is worth it when you will keep the loan longer than the break-even period, which is the upfront cost of the points divided by the monthly payment savings. On a typical 30 year DSCR loan that break-even lands around five years. Hold the loan past that and the buydown makes money every month. Sell or refinance before it and you paid for savings you never collected. There is one exception that changes the answer completely: when the lower payment is what gets the property to qualify at all.
This guide works the math on one loan from start to finish, then covers the three things that should move your decision: your hold period, your prepayment penalty, and your DSCR ratio.
What a point is and what it buys
One point is one percent of the loan amount, paid at closing. On a $300,000 loan, one point is $3,000. Points come in two kinds that often get blurred together on a quote.
- Origination points are the lender's or broker's fee for making the loan. They do not change your rate.
- Discount points are optional. You pay them to lower the interest rate for the life of the loan.
This article is about discount points. When you compare quotes, make sure you know how many of the points on each one are buying rate and how many are simply cost. A loan with two points and a low rate may be one origination point plus one discount point, and the honest comparison is against a loan with one point and the higher rate. Our breakdown of DSCR closing costs and fees shows where each of these appears on the settlement statement.
How much rate a point buys is not fixed. It changes with the market, the lender, your credit, and your leverage. A quarter of a percent per point is a common rule of thumb, and it is the figure used below, but your term sheet is the only source that counts.
The break-even math on a real loan
Take a $300,000 DSCR loan, 30 year fixed. The numbers here are for illustration only and are not a rate quote.
- Option A, no discount points: 7.25 percent. Principal and interest is $2,046.53 a month.
- Option B, one discount point ($3,000): 7.00 percent. Principal and interest is $1,995.91 a month.
- Option C, two discount points ($6,000): 6.75 percent. Principal and interest is $1,945.79 a month.
Option B saves $50.62 a month for $3,000 up front. Divide the cost by the savings: $3,000 divided by $50.62 is 59 months. Option C saves $100.74 a month for $6,000, which is 60 months. Either way, you are just under five years before the buydown has paid for itself.
The lower rate also pays the loan down slightly faster. After five years the 7.00 percent loan has a balance about $740 lower than the 7.25 percent loan. That shortens the true break-even by a month or so. It does not change the shape of the decision.
So the first question is simple. Will this loan still exist in five years?
Be honest about your hold period
Investors tend to say they are holding forever and then refinance or sell in year three. Before you pay for a rate you plan to keep for decades, look at what you have actually done with past loans and what could end this one early.
- A rate drop. If rates fall meaningfully, you will want to refinance. Every dollar of discount points on the old loan that has not been earned back is gone the day you do.
- A cash-out refinance. If the plan is to pull equity out in a few years to fund the next purchase, this loan has a short life no matter what you intend today.
- A sale. A portfolio rebalance, a partner exit, or simply a strong offer.
If your honest answer is seven years or more, a buydown with a five year break-even is a reasonable use of cash. If it is three years, keep the points in your pocket. If you do not know, that uncertainty is itself an argument for the higher rate and the lower closing cost, because cash kept is flexible and points paid are not.
Your prepayment penalty and your buydown should agree with each other
Most DSCR loans carry a prepayment penalty that steps down over time, and a longer penalty period usually earns a better rate. That creates a common mistake: an investor chooses the shortest prepayment period to stay flexible, then pays two discount points to get the rate back down. Those two choices point in opposite directions. The first says you might leave early. The second only pays if you stay.
Line them up instead.
- If you are confident in a long hold, take the longer step-down for the rate improvement first, because that improvement costs nothing at closing. Then consider discount points on top.
- If you want the option to exit early, take the shorter step-down and skip the discount points.
The full mechanics of the penalty structures are in how a 5/3/1 step-down works and how to choose.
The exception: when the buydown makes the deal qualify
DSCR loans qualify on the property's rent divided by its monthly payment of principal, interest, taxes, insurance, and any association dues. A lower rate means a lower payment, and a lower payment means a higher ratio. Sometimes that is the difference between a loan and no loan.
Same $300,000 loan. Say market rent is $2,500 and taxes plus insurance total $500 a month.
- At 7.25 percent, the payment is $2,546.53. The ratio is 0.98. Below 1.0, the property does not cover its own debt.
- At 7.00 percent, the payment is $2,495.91. The ratio is 1.00.
- At 6.75 percent, the payment is $2,445.79. The ratio is 1.02.
Here the point is not competing against a five year break-even. It is competing against the other ways of fixing a ratio that falls short: bringing more cash to closing to shrink the loan, or walking away from the property. To get the ratio to 1.0 at 7.25 percent without points, you would have to cut the loan by roughly $6,800, which means $6,800 more down payment. One point at $3,000 gets you to the same place for less cash. In that situation the buydown is the cheapest tool available, even if you sell in three years.
The same logic applies at pricing tiers. Lenders price loans in bands, and crossing from one band into the next can improve the rate or the leverage you are offered. If a buydown lifts your ratio into a better tier, the lender's pricing may improve by more than the point itself bought. Ask your loan officer to price both sides of the line. For how the ratio is built and where the tiers sit, see how to calculate DSCR on a rental.
What else that $3,000 could do
Break-even math treats the points as if the only alternative were leaving the money in a drawer. An active investor has other uses for it, and the comparison is worth making out loud.
- Reserves. One point on this loan is a little more than one full monthly payment. For a newer investor with thin reserves, that cushion can be worth more than $50 a month.
- The next down payment. If you are buying two or three properties a year, discount points across every loan add up to a meaningful part of another acquisition.
- A larger down payment on this loan. Putting the $3,000 toward principal instead lowers the payment by about $20 a month at these rates, less than half of what the point saves. Dollar for dollar, the point lowers the payment more. The extra down payment, though, stays yours as equity, and the point does not.
Look at it as a return, too. Paying $3,000 to save about $607 a year is roughly a 20 percent annual return on the cash, for as long as the loan lasts. That is a strong number if you hold for ten years and a loss if you hold for three. The return depends entirely on time.
Financing the points
Some loans let you roll points into the loan amount instead of paying them in cash, as long as the leverage limit allows it. That preserves cash, but it means you are borrowing the points at the loan's rate for 30 years and your starting balance is higher. Run the break-even on the financed version separately. It will be longer.
A quick word on taxes
On a rental property, points are generally not deducted all at once in the year you pay them. They are typically spread across the life of the loan, with the remainder deducted if the loan is paid off early. That softens the cost a little and does not rescue a bad buydown. Your CPA should confirm the treatment for your situation.
How to decide in five minutes
- Ask for the loan priced at least two ways: no discount points, and one or two points. Get the rate and the payment for each.
- Divide the extra cost by the monthly savings. That is your break-even in months.
- Compare it to a realistic hold period, and to the prepayment structure you are choosing.
- Check whether the lower rate moves your DSCR across 1.0 or into a better pricing tier. If it does, weigh the points against the extra down payment you would otherwise need.
- Decide what the cash is worth to you elsewhere.
If the break-even is comfortably shorter than your hold, and the cash is not needed for reserves or the next deal, buy the rate down. If not, take the higher rate without regret. A slightly higher payment on a loan you can leave is often worth more than a lower one you paid to be locked into.
Our DSCR loan program offers points starting at zero and step-down prepayment options, so you can ask us to price the same property both ways and see the trade in real numbers before you commit.