The Quick Read: Plan the payoff for just after a step-down anniversary, then check that the new loan clears three gates at the same time: the penalty math, the appraisal and leverage limit, and rental coverage on the new payment, with the old note’s own wording deciding every date. A three-year step-down means the fee shrinks each year and disappears after year three. The decision is a break-even comparison, not a rule of thumb.
- A 3-2-1 schedule charges 3% of the balance if you pay off in year one, 2% in year two, and 1% in year three.
- The percentage that counts is the one in force on the payoff date, not the application date.
- Waiting for the next step only pays if the savings you give up are worth less than the points you save.
- The penalty never rolls into the new loan, but the new loan starts its own clock.
- Clearing the penalty is one gate of three. Appraisal, leverage, and coverage can still stop the deal.
What a Three-Year Step-Down Actually Is
A step-down prepayment charge is a fee you owe if you pay off the loan early, and it shrinks as the loan ages. In a three-year version, the fee is a percentage of the balance you owe at payoff. It is 3% in the first year, 2% in the second, and 1% in the third. After that, nothing.
DSCR Cash-Out Calculator
Run the cash-out numbers in your market
Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 15, 2026
Prefilled with starting assumptions — enter your property’s value, balance, taxes, and insurance for a more accurate picture.
Program parameters update from Lendmire’s centralized guideline source. Taxes and insurance are editable estimates.
As of Oct 15, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Property value, balance, taxes, and insurance are editable estimates. Maximum loan-to-value varies by lender, program, property type, and seasoning. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
Most lenders in the wholesale network use some form of this kind of schedule on investor loans, and the exact terms live in the prepayment rider attached to your note. Think of the fee as a cost of exit, not a rule against refinancing. You can refinance in month four. You will just pay for the privilege.
Three details inside the rider matter more than the headline percentages.
- What triggers it. A sale, a refinance, a full payoff, or a large paydown can all trigger the fee.
- What it applies to. Many notes charge the percentage on the unpaid balance. Some use the original loan amount. Read which one yours uses.
- Hard or soft. A hard prepayment charge applies to both sales and refinances. A soft one applies only to refinances. For a refinance question, both versions bite.
Key Terms Defined
Step-down: A prepayment schedule where the fee drops at each anniversary of the loan.
Prepayment window: The stretch of time during which paying off the loan triggers the fee.
Seasoning: The waiting period a lender wants between owning or financing a property and doing a cash-out refinance on it.
Cash-out refinance: A new, larger loan that pays off the old one and hands you the difference in cash.
PITIA: Principal, interest, taxes, insurance, and any association dues. This is the monthly obligation that rent is measured against.
Curtailment: A partial principal paydown. Some notes allow a limited amount each year without a fee, and the allowance varies by lender.
The Three-Year Calendar
Here is the whole schedule in one view. The right column is the question you should be asking at each stage.
| Stage | Fee on payoff | What a refinance means here |
|---|---|---|
| Year one | 3% of balance | Costliest exit. Needs a strong reason. |
| Year two | 2% of balance | Penalty falls by a third. Run the break-even. |
| Year three | 1% of balance | Often a modest cost to model. |
| After year three | None | Only closing costs remain. |
The fee is set by the payoff date. That is the date the old note is satisfied at closing. It is not the day you applied or the day you requested a payoff statement. A closing that slips past an anniversary can drop you a full step. A closing that slips the wrong way can leave you a step higher than you planned.
Notes also define “year one” differently. Some count from closing and some from the first payment date. Read the rider, and ask your servicer to confirm the exact date the next step takes effect.
How Underwriting Treats the Refinance, Step by Step
A DSCR refinance qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. The penalty is only the first thing in the file. Here is the sequence.
1. Read the rider. Confirm the schedule, whether the fee runs on the unpaid or original balance, whether it is hard or soft, and how the note defines each year.
2. Map the anniversaries. Put the step dates on a calendar. Build in cushion around each one so a closing delay does not cost you a step.
3. Order a payoff statement. It shows the balance and the fee that applies if the window is still open. A refinance file also typically carries the existing note, the prepayment schedule, a current lease or rent roll, and payment history.
4. The appraisal sets rent and value. On a single-family rental, the appraiser typically completes the 1007 market-rent schedule. On a two-to-four-unit property, the 1025 income report is common. A lease above the appraiser’s market-rent figure may not be accepted at face value.
5. Coverage is re-tested on the new payment. In a cash-out, the larger loan means a larger payment, and that lowers the ratio. Thin rent can cap the loan before equity does.
6. Close and pay off. The old note’s fee is a closing cost. It is paid at the table, and for a cash-out it comes out of your proceeds.
Across the network, 1.00 is where many select programs start for coverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger ratios open better pricing and leverage.
The Three Gates
The refinance only works if all three gates clear together. Many investors watch the first and get surprised by the other two.
Gate one: the penalty. This is the percentage on the payoff date, plus whatever your note allows for paydowns. It is a known number you can calculate before you apply.
Gate two: appraisal and leverage. Cash-out on a standard rental tops out around 75% LTV across most of the network. Short-term rental collateral tops out lower. Cash-out also commonly carries about six months of seasoning, and that clock is separate from your prepayment clock. Credit matters too. A 620 floor exists in parts of the network, most programs want around 660, and 700-plus opens the strongest leverage tiers. A low appraisal cuts your loan amount, and the penalty does not shrink to match.
Gate three: coverage. Rent divided by the full monthly obligation must clear the program’s floor. Reserves also matter. They commonly run about six months of PITIA, though conservative rate-and-term files at modest leverage under $1,500,000 can see reserves waived. Larger loans typically step up to about nine months.
One caution on the ratio itself. Coverage compares rent to PITIA only. Clearing 1.00 is not the same as positive cash flow, because repairs, vacancy, management, utilities, and capex sit outside the math.
Should You Wait for the Next Step?
Wait only if the savings you give up while waiting are worth less than the percentage points you avoid. Closing costs drop out of this comparison because you pay them whether you go now or later. They matter only to the separate question of whether to refinance at all.
Run the logic this way. Say the next step is three months away and it cuts the fee by one percentage point of the balance. Waiting costs you three months of whatever monthly benefit the new loan would bring. If three months of that benefit is worth less than one percent of the balance, waiting wins. If it is worth more, go now.
Now compare how that plays out across three modeled situations. These are illustrations of logic, not market data.
Refinancing late in year one. Picture an investor ten months in who wants cheaper financing. Moving now means a 3% fee. Waiting two months drops it to 2%. Unless the monthly benefit is large, two months of patience is cheap. Waiting usually wins here.
Refinancing early in year three. Say the fee is already at its last step, 1%. Waiting another year or so avoids it entirely, but a full year of the new loan’s benefit is forgone. Unless the benefit is thin, that is often too long to wait. Pay the small fee and go.
Refinancing a month before the window ends. The fee is 1% and falls to zero in a few weeks of calendar time, so waiting is the better move. This is the easiest call in the schedule, because nothing meaningful is lost.
| Your situation | What the numbers usually favor | What changes the answer |
|---|---|---|
| Next step is close | Wait for the step | A large monthly benefit from refinancing now |
| Next step is a year away | Often go now | A thin monthly benefit |
| Final step is near expiry | Wait for zero | A lease expiring or a coverage problem |
| Cash-out for the next purchase | Go if proceeds clear after the fee | A low appraisal or tight leverage cap |
| Planning a sale soon | Compare sale costs, not a refinance | A hard penalty applies to sales too |
The honest answer is that this is a close call more often than lender marketing suggests. The savings from a new loan are real, but so is the fee. Model both before you commit.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
Where the General Rule Breaks
Federal consumer limits do not set your schedule. DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. The federal consumer-mortgage rules on prepayment charges exclude credit extended primarily for a business purpose, even when a dwelling secures it. What counts is the purpose of the loan, not the label on the property, as Compliance Alliance explains. So your contract note governs, and some states restrict prepayment charges, so confirm the rules for the property’s state.
Not every note is a step-down. Alternatives include a flat percentage for the full term, a schedule that never reaches zero, and yield maintenance, which can be much larger than a simple step-down. If your note is one of these, the calendar above does not apply. Lendmire’s piece How to Time a Sale Around Yield Maintenance on a Five-Year DSCR Note covers that structure.
Partial paydowns. Some notes allow a limited principal paydown each year without a fee. Paying down inside that allowance lowers the balance the percentage applies to, but it does not remove the fee on a full payoff.
Same-lender refinance. Some lenders reduce or waive the fee if you refinance with them. It costs nothing to ask, but do not build your plan around it.
Exiting hard money. Short-term rehab loans typically carry no prepayment charge. If your DSCR loan was the exit from one, the three-year clock started with the DSCR loan.
Cash-out seasoning. Seasoning is a different gate from the prepayment window. You can be past the penalty and still be waiting on seasoning, or the reverse.
A Countdown Plan
You do not need a precise day count. You need checkpoints.
- From the start of the final year. Read the rider again. Confirm the step dates and whether the fee runs on the unpaid or original balance.
- A comfortable stretch before the target step. Order a payoff statement, gather the lease and payment history, and check your credit and reserves against the program you expect to use.
- Before you apply. Decide your target structure and confirm that rent comfortably supports coverage on the larger payment if you are taking cash out.
- At application. Order the appraisal with enough cushion that the closing lands after the step, not before it. If any piece slips, the cushion is what saves you.
What Happens to the Clock on the New Loan
Nothing carries over. The old fee is a payoff cost and ends at closing. The new loan starts its own prepayment clock, and it may be a different structure from the old one.
Pick the new structure for your probable next refinance date, not your hold period. A shorter or smaller prepayment term usually comes with pricier terms, so you are trading flexibility against cost. If you expect to refinance again in a couple of years, a longer window can wipe out the savings that justified this move.
The lender’s term structures matter here too. The 30-year fixed is the spine of most programs. Extended terms and interest-only periods are available through select lenders, and adjustable structures exist for investors who want them.
Common Mistakes and Failure Scenarios
- Treating the fee as a fee on every payment. It applies only to payoffs and paydowns above any allowance.
- Assuming the old penalty rolls into the new loan. It does not.
- Skipping the appraisal risk. A low value shrinks the loan while the fee stays the same.
- Ignoring the coverage retest. A cash-out can drop the ratio enough to cap the loan, even when equity is plentiful.
- Forgetting that the fee comes out of proceeds. The check you receive is smaller than the headline equity suggests.
- Moving the closing across a step line. A delay that pushes the payoff date past an anniversary helps you. One that lands you before it hurts.
- Treating a lower payment as the whole case. The fee, the closing costs, and the new clock all belong in the break-even.
Cash-out proceeds can raise tax questions, so confirm the treatment with a tax professional before you close.
For a related view on exit costs under a different loan type, see Lendmire’s piece How to Time a Refinance Around a Bank Statement Loan Exit Fee. For the bigger picture on how these loans work, the complete DSCR loans guide walks through programs end to end.
Frequently Asked Questions
Does the fee apply to the current balance or the original amount?
It depends on the note. Many charge the percentage on the unpaid balance, and some use the original loan amount. The rider spells it out, so check that line before you model anything.
Can I refinance any time, even inside the window?
Yes. The penalty is a cost, not a barrier. You can refinance in year one if the savings or equity use justify paying the fee.
What if my closing slips past the anniversary?
You pay the lower percentage, because the payoff date sets the fee. That is why a cushion around each step date helps. Slipping the other way, with a closing before the anniversary, costs you a step.
Does the new loan restart the penalty clock?
Yes. The old fee ends at closing, and the new loan begins its own schedule. Choose its structure based on when you expect to refinance or sell next.
How often can I refinance?
There is no fixed limit on the penalty side. The practical limits are seasoning on cash-out files, the fee on each new note, and closing costs. Each cycle has to pass its own break-even.
If You Are Buying or Refinancing a Rental
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Lendmire is a broker that arranges these loans through select lenders in its wholesale network, across 41 markets including Washington, D.C. Every file is underwritten individually and is not a commitment to lend.
About Lendmire
Lendmire (NMLS# 2371349), a non-QM mortgage broker serving investors in 41 markets including Washington, D.C., helps structure DSCR scenarios commonly evaluated around a property’s rental income rather than personal income paperwork, subject to lender guidelines. A Scotsman Guide Top Mortgage Workplace in 2025 and 2026, Lendmire places loans through wholesale investor lenders and is not a direct lender.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Cornell LII – 12 CFR Part 1026 Supplement I (Reg Z interpretations)
2. Compliance Alliance – Reg Z and Investment Properties
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How a Five-Year Super Jumbo DSCR Loan Fits a Plan to Sell or Refinance · How to Refinance the Home You Moved Out of With a DSCR Loan · How to Take an Ex-Spouse Off a Rental Mortgage With a DSCR Refinance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.