DSCR Loan Rate Buydowns: Are Points Worth It?

When securing a DSCR loan, you'll almost always face a decision: accept the lender's par rate or pay "points" to buy down your interest rate. Each point—equal to 1% of your loan amount—typically reduces your rate by 0.25% to 0.375%, directly impacting your monthly payment and long-term interest costs.

For a $400,000 loan, one point costs $4,000. Two points cost $8,000. That's real money upfront. But is it a good investment?

The answer depends on your hold period, alternative uses for that capital, cash flow needs, and tax situation. This comprehensive guide breaks down the mathematics, strategies, and decision frameworks for determining when paying points makes sense and when it's burning money.

Understanding Discount Points

Discount points (also called "mortgage points" or simply "points") are prepaid interest that permanently reduces your loan's interest rate.

How Points Work

One point = 1% of loan amount

Examples:

• $300,000 loan: 1 point = $3,000
• $400,000 loan: 1 point = $4,000
• $500,000 loan: 1 point = $5,000

Rate reduction per point: typically 0.25% to 0.375%

The exact reduction varies by:

• Market conditions
• Lender pricing
• Loan amount
• Property type
• Overall credit/deal strength

Points vs Origination Fees

Discount points (what this article covers):

• Buy down your interest rate permanently
• Optional
• Tax deductible for investment properties

Origination fees or "points":

• Lender's processing fee
• Don't reduce your rate
• Required (though negotiable)
• Also tax deductible but different purpose

Always clarify which "points" a lender is discussing.

The Mathematics of Rate Buydowns

Basic Example: $400,000 Loan, 30-Year Term

No points option:

• Rate: 8.00%
• Monthly payment: $2,935
• Total interest over 30 years: $656,474

One point option:

• Upfront cost: $4,000
• Rate: 7.75%
• Monthly payment: $2,865
• Total interest over 30 years: $631,496
• Monthly savings: $70
• Total interest savings: $24,978

Analysis:

• Upfront investment: $4,000
• Monthly benefit: $70
• Break-even: $4,000 / $70 = 57 months (4.75 years)
• Net savings if held 30 years: $20,978 ($24,978 - $4,000)

If you hold the loan more than 4.75 years, you come out ahead. If you refinance or sell earlier, you lost money on the points.

Two Points Example: Same Loan

Two points option:

• Upfront cost: $8,000
• Rate: 7.50%
• Monthly payment: $2,797
• Total interest over 30 years: $607,024
• Monthly savings vs no points: $138
• Total interest savings: $49,450

Analysis:

• Upfront investment: $8,000
• Monthly benefit: $138
• Break-even: 58 months (4.8 years)
• Net savings if held 30 years: $41,450 ($49,450 - $8,000)

Notice the break-even period is nearly identical despite doubling the investment. This shows diminishing returns: the first point often provides better value than subsequent points.

The Diminishing Returns Principle

Rate buydown progression (typical):

Each additional point provides progressively smaller payment reduction. Going from 0 to 1 point saves $70/month. Going from 1 to 2 points saves only $68/month (not $70 again).

Key insight: The first point typically offers the best value. Additional points face diminishing returns.

Break-Even Analysis: The Critical Number

Break-even is the number of months you must hold the loan for points to pay off.

Break-Even Formula

Break-even months = Total points cost / Monthly payment savings

Example:

• Points cost: $6,000
• Monthly savings: $105
• Break-even: $6,000 / $105 = 57 months

How Long Will You Really Hold the Loan?

This is the critical question that determines whether points make sense.

Average hold periods by strategy:

Fix-and-flip: 6-18 months → Points almost never make sense BRRRR: 6-12 months until refinance → Points rarely make sense Short-term rental arbitrage: 12-24 months → Points usually don't make sense Value-add hold: 3-5 years → Points might make sense Buy-and-hold: 7-10 years → Points often make sense Legacy hold: 15+ years → Points almost always make sense

Reality check: Most investors overestimate hold period. Life happens:

• Better properties emerge (sell to upgrade)
• Market peaks (sell to harvest gains)
• Financial needs change (need liquidity)
• Refinancing opportunities (rates drop)

Studies show average hold period for investment properties is 7-10 years, even among "forever hold" investors.

Refinancing Resets the Clock

If you refinance, you pay off the existing loan—and lose any remaining benefit from points you paid.

Example:

• Paid 2 points ($8,000) for lower rate
• Refinance after 3 years
• Break-even was 58 months
• You "lost" 22 months of benefit
• Points cost you money in this scenario

This is why points make more sense when:

• Rates are already low (less likely to refinance for better rate)
• You're confident in long-term hold
• Property is stabilized (not value-add with planned refinance)

Beyond Break-Even: Opportunity Cost

Even if you exceed break-even, points might still be wrong choice due to opportunity cost.

Opportunity Cost Example

Scenario: $400,000 loan, 2 points = $8,000

Option A: Pay points

• Save $138/month on payment
• Total 5-year savings: $8,280
• Net return: $280 ($8,280 - $8,000 cost)
• Annualized return: ~0.7%

Option B: Skip points, invest the $8,000

• Put $8,000 toward next property down payment
• Generate 8% annual return through another property
• 5-year value: ~$11,700
• Plus you still have the capital deployed

Comparison:

• Option A net position: $280 ahead
• Option B net position: $3,700+ ahead plus capital still working

For active investors building portfolios, the $8,000 is often worth more deployed as next down payment than locked into rate reduction.

Time Value of Money

$8,000 today vs $8,280 over 60 months

Even if break-even works mathematically, you're tying up capital for 5 years to earn minimal return. That same capital could:

• Fund emergency reserves earning 4-5% in high-yield savings
• Provide down payment for property returning 8-12% annually
• Invest in index funds (historical 10% returns)
• Fund property improvements increasing value and rents

Points make most sense when:

• You have excess capital with no better use
• You're not actively scaling your portfolio
• Maximizing this specific property's cash flow is the priority

When Rate Buydowns Make Sense

Scenario 1: Long-Term Legacy Hold

Profile:

• You plan to hold 15+ years minimum
• Property is for retirement income
• You're not actively acquiring more properties
• Cash flow optimization is primary goal

Example:

• $500,000 loan
• 2 points ($10,000) saves $170/month
• Over 15 years: $30,600 savings
• Net benefit: $20,600
• Plus property cash flow is $170/month better throughout hold

Verdict: ✅ Points make excellent sense

Scenario 2: Marginal DSCR Qualification

Profile:

• Property DSCR is 1.20, barely qualifying
• Lender requires 1.20 minimum
• Lower payment from buying down rate improves DSCR
• Enables acquisition you otherwise couldn't make

Example:

• Rental income: $3,600/month
• Required DSCR: 1.20
• Maximum payment: $3,000

Without points: 8% rate = $3,050 payment = 1.18 DSCR ❌ With 2 points: 7.5% rate = $2,910 payment = 1.24 DSCR ✅

Verdict: ✅ Points enable the deal (though evaluate if forcing a marginal deal is wise)

Scenario 3: Maximizing Monthly Cash Flow

Profile:

• Building reserves is top priority
• Extra monthly cash flow goes to emergency fund
• Portfolio stability more important than rapid scaling
• You value the psychological benefit of higher monthly income

Example:

• Two points reduce payment $150/month
• That's $1,800 annually to reserves
• Accelerates reaching 6-month reserve target
• Provides peace of mind and portfolio stability

Verdict: ✅ Points make sense if cash flow is genuinely the priority

Scenario 4: High-Income Tax Situation

Profile:

• You're in high tax bracket (32%+)
• Points are immediately deductible for investment property purchases
• Tax deduction value is substantial

Example:

• Points paid: $8,000
• Tax bracket: 35%
• Tax savings: $2,800
• Effective cost: $5,200
• Reduces break-even by ~35%

Note: On refinances, points must be deducted over loan life (not immediately), reducing this benefit. Consult your CPA.

Verdict: ✅ Tax benefits improve the math, though shouldn't be sole driver

Scenario 5: Rate Environment at Peak

Profile:

• Current rates are historically high (8-9%+)
• You believe rates will stay elevated long-term
• No expectation of refinancing opportunity
• Locking in best possible rate is priority

Example:

• Rates at 8.5%
• Buy down to 8.0%
• Believe rates will remain 7.5-9% for next decade
• Lower chance of beneficial refinance opportunity

Verdict: ✅ Points make more sense when refinancing seems unlikely

When to Skip Rate Buydowns

Scenario 1: Short-Term Hold or Flip

Profile:

• Plan to sell within 3 years
• Renovating then selling
• BRRRR strategy with 6-12 month refinance timeline

Example:

• Break-even on points: 60 months
• Planned hold: 18 months
• You'd "use" only 30% of points value
• Lost capital: ~70% of points paid

Verdict: ❌ Skip points completely

Scenario 2: Actively Scaling Portfolio

Profile:

• Buying 2-3 properties per year
• Capital is constraint
• Every $5,000 matters for next down payment
• Prioritizing portfolio growth over individual property optimization

Example:

• Have $100,000 available capital
• Each property requires $25,000 down
• Paying points reduces to 3 properties instead of 4
• Fourth property generates 8% COC return ($2,000/year)
• Points savings: $100-150/month ($1,200-1,800/year)

Verdict: ❌ Capital better deployed acquiring more properties

Scenario 3: Refinance Likely

Profile:

• Rates are historically high
• Value-add property with planned refinance after improvements
• Market conditions suggest rates may fall
• Property purchased below market, will refinance based on improved value

Example:

• Current rates: 8.5%
• Buy down to 8.0% with points
• Refinance after 2 years when rates drop to 7.0%
• Points benefit lost when refinancing
• Money wasted

Verdict: ❌ Skip points when refinance is planned

Scenario 4: Cash Flow Already Strong

Profile:

• Property cash flows $800+/month at par rate
• Payment reduction doesn't materially change anything
• You have plenty of reserves
• Other uses for capital exist

Example:

• Current cash flow: $825/month
• With points: $950/month
• Marginal benefit: $125/month
• Points cost: $6,000
• Better to invest $6,000 elsewhere

Verdict: ❌ Unnecessary optimization when cash flow is already excellent

Scenario 5: Alternative Investments Available

Profile:

• You have specific higher-return use for capital
• Another property ready to acquire
• Business investment opportunity
• Stock market at attractive entry point

Example:

• Points cost: $10,000
• Points return: ~3-5% annualized
• Alternative investment: 12% expected return
• Opportunity cost: 7-9% annually

Verdict: ❌ Deploy capital to higher-return opportunity

How Many Points to Pay?

If you decide points make sense, how many should you pay?

The First Point Usually Offers Best Value

Due to diminishing returns:

$400,000 loan example:

First point generates $17.50 monthly savings per $1,000 invested. Second point generates $17.00 monthly savings per $1,000 invested.

Best practice: If paying points, 1-1.5 points typically optimal unless you're absolutely certain of 15+ year hold.

Negotiate Points Pricing

Not all lenders offer same rate reduction per point. Shop this specifically:

Lender A: 1 point = 0.25% reduction Lender B: 1 point = 0.375% reduction

Lender B offers 50% more value per point paid. Always compare rate sheets from multiple lenders.

Points and DSCR Qualification Strategy

Using Points to Qualify

If your DSCR is borderline, buying down the rate reduces monthly payment and improves DSCR:

Example:

• Rental income: $3,500/month
• Required DSCR: 1.25
• Maximum payment: $2,800

Option 1: No points at 8%

• Monthly payment: $2,935
• DSCR: 1.19 ❌ Doesn't qualify

Option 2: 1.5 points at 7.625%

• Monthly payment: $2,825
• DSCR: 1.24 ✅ Qualifies (just barely)

Option 3: Reduce loan amount by $20K

• New loan: $380,000
• Monthly payment at 8%: $2,788
• DSCR: 1.26 ✅ Qualifies

Compare Option 2 vs 3:

• Option 2: Pay $6,000 in points
• Option 3: Increase down payment by $20,000

If you have the capital, Option 3 is usually better—you maintain equity rather than spending it on points, and can pull it back out later through cash-out refinancing.

Use points to qualify only when:

• You're just slightly short
• Increasing down payment isn't feasible
• Property fundamentals are strong enough to justify the expense

Tax Treatment of Points on DSCR Loans

Investment Property Purchase

Points paid on investment property purchases are immediately deductible as a business expense in the year paid.

Example:

• Points paid: $8,000
• Tax bracket: 30%
• Tax savings Year 1: $2,400
• Effective cost: $5,600

This improves the ROI calculation significantly.

Investment Property Refinance

Points paid on refinances must be deducted over the life of the loan.

Example:

• Points paid: $8,000
• 30-year loan
• Annual deduction: $267/year
• Tax bracket: 30%
• Annual tax savings: $80

This is much less valuable than immediate deduction.

Record Keeping

Keep documentation:

• Closing disclosure clearly showing points paid
• Separate from other closing costs
• Maintain for tax filing

Work with a CPA familiar with real estate investing to maximize deductions properly.

Alternative: Negative Points (Lender Credits)

Instead of paying points to reduce your rate, you can accept a higher rate in exchange for lender credits that cover closing costs.

How Lender Credits Work

Example rate sheet:

• 7.50% rate: Pay 2 points ($8,000)
• 7.75% rate: Pay 0 points (par)
• 8.00% rate: Lender credit 1 point ($4,000)
• 8.25% rate: Lender credit 2 points ($8,000)

By accepting 8.25% instead of 7.75%, you receive $8,000 credit toward closing costs.

When Lender Credits Make Sense

Use lender credits when:

• You're definitely refinancing within 1-3 years
• Cash preservation is critical
• Closing costs would drain reserves dangerously low
• Value-add property with quick exit planned

Example:

• Closing costs: $10,000
• Option A: 7.75% rate, pay $10K closing costs from pocket
• Option B: 8.25% rate, lender covers $8K, you pay $2K

If refinancing within 24 months, Option B saves you $8,000 in upfront capital at modest interest cost (maybe $1,000-1,500 over 24 months).

Decision Framework: Should You Pay Points?

Run through this checklist:

✅ Consider Paying Points If:

• You plan to hold 7+ years
• You're not actively scaling portfolio
• Refinancing is unlikely (rates already reasonable)
• Cash flow improvement is meaningful to your strategy
• You have excess capital with no better deployment
• Property is legacy/retirement hold
• Points enable qualification for strong property
• You're in high tax bracket (purchase, not refinance)

❌ Skip Points If:

• Holding less than 5 years
• Planning to refinance (value-add, rate environment)
• Actively acquiring more properties
• Capital is constrained
• Cash flow is already strong without points
• Better investment opportunities exist
• Break-even exceeds realistic hold period
• Property is speculative/uncertain hold

The Bottom Line

Paying points to buy down your DSCR loan rate can be excellent strategy or wasteful spending—it entirely depends on your specific situation and hold timeline.

Points make most sense for:

• Long-term legacy holds
• Investors optimizing individual properties over portfolio scaling
• Situations where marginal DSCR improvement enables acquisition
• Scenarios with excess capital and no better deployment

Points are usually poor choice for:

• Short-term holds or flips
• BRRRR strategies with planned refinancing
• Active portfolio builders deploying capital for growth
• Properties likely to be sold or refinanced within 3-5 years

The critical number is break-even period—calculate it precisely, then honestly assess whether you'll hold that long. Most investors overestimate hold periods, making points a money-losing proposition.

If in doubt, err toward conserving capital rather than paying points. The opportunity cost of locking money into rate buydowns often exceeds the benefit, especially for active investors building wealth through property acquisition.

The most sophisticated investors calculate the numbers property-by-property, sometimes paying points on core holdings while skipping them on tactical positions—recognizing that different properties serve different roles in a portfolio and merit different financing strategies.

Calculate thoroughly, be honest about your timeline, and remember that preserving capital optionality often trumps marginal payment optimization.