The Quick Read: A rate-and-term refinance replaces your existing rental-property loan with a new one that changes the structure, the term, or both. It pays off only what you owe plus closing costs, takes no cash out, and qualifies primarily on property-level rental income covering the new full monthly payment, subject to lender guidelines.
- The new loan must be covered by rent. The test is gross monthly rent divided by the new principal, interest, taxes, insurance, and association dues.
- Select programs in Lendmire’s network typically reach up to 85% LTV on an investment-property rate-and-term refinance. A cash-out on a standard rental tops out around 75%.
- The label depends on where the dollars go at closing. Cash back, or paying off unrelated debt, can flip the file to cash-out.
- A refinance only pays if your savings outrun closing costs plus any prepayment penalty on the old loan.
- Credit, reserves, appraisal, and property eligibility still apply. Every file is underwritten individually.
Key Terms Defined
Rate-and-term refinance: A new loan that replaces the old one with a different rate, term, or structure, and no equity comes out to you. Yahoo Finance describes it as a non-cash-out refinance that can also switch a loan from adjustable to fixed.
DSCR (debt service coverage ratio): Monthly rent divided by the full monthly housing payment. A result of 1.00 means rent equals the payment.
PITIA: Principal, interest, taxes, insurance, and association dues. It is the payment side of the DSCR math.
LTV (loan-to-value): The loan balance as a percentage of the property’s appraised value.
Seasoning: The waiting period a lender wants between two events, usually between buying or refinancing a property and refinancing it again.
Prepayment penalty: A fee for paying off a loan early, often on a step-down schedule over several years.
Recharacterization: When a lender reclassifies a refinance from rate-and-term to cash-out because of how the money moves at closing.
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.
What Does a Rate-and-Term Refinance Actually Change?
It changes the loan, not your equity. You swap the old note for a new one, and the balance stays roughly flat apart from costs that get folded in.
Investors usually have one of four goals:
- Exit short-term debt. A bridge or hard-money loan comes due, and a long-term loan replaces it.
- Fix an adjustable loan. An ARM is about to reset, and a fixed structure removes the uncertainty.
- Change the term or structure. That might mean a longer amortization, or an interest-only period through select lenders in the network.
- Escape bad terms. An old loan may carry a penalty that has stepped down, or a structure that no longer fits the property.
A cash-out refinance does the opposite. It borrows more than you owe and pays you the difference, per NerdWallet, and NerdWallet adds that cash-out generally prices higher than a rate-and-term loan. That pricing gap is one reason the classification matters so much. Lendmire’s piece Rate-and-Term vs Cash-Out Refinance: How Lenders Classify Your Loan goes deeper on the line between the two.
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. That is why traditional personal-income documentation does not drive the decision. For the full picture, see the complete DSCR loans guide.
How Does the Process Work, Step by Step?
Underwriting follows a predictable sequence. Each step feeds the next, and a weak result at one step usually shows up at the DSCR calculation.
1. Confirm the transaction is no-cash-out. The new loan should cover the payoff, accrued interest, and closing costs. Nothing should come back to you.
2. Order the payoff letter. Your current lender states the exact payoff. Read the old note at the same time for a prepayment penalty.
3. Order the appraisal and rent determination. The appraisal sets the value used for LTV. It also supports market rent, usually through a rent schedule on the appraisal report.
4. Establish rent used for lender review. Many programs in the network use the lower of the lease rent and the appraiser’s market rent.
5. Calculate coverage. The lender divides gross monthly rent by the full PITIA on the new loan.
6. Review credit, entity, and reserves. The lender pulls credit, checks the borrowing entity, and verifies liquid funds.
7. Clear title and close. The old loan is paid off, and the new one takes its place.
A typical document set includes the payoff letter, current leases or a rent schedule, entity papers if the property sits in an LLC, a hazard insurance policy, and identification for the credit pull. LLC-titled loans are available subject to lender program eligibility, so confirm the entity structure before you apply.
How Is Coverage Calculated on a Refinance?
Coverage is gross monthly rent divided by the new loan’s full monthly payment. Everything on the payment side counts: principal, interest, taxes, insurance, and association dues.
The refinance can change that ratio in either direction. A longer amortization or an interest-only period shrinks the payment and lifts the ratio. A tax or insurance bump on the new escrow lowers it.
Consider a scenario with a modeled ratio. Say a duplex clears roughly 1.10x on its current loan. After a refinance into a longer amortization, the same rent clears roughly 1.25x. Nothing about the rent changed. Only the payment did.
Two cautions belong here.
First, clearing the ratio is not the same as positive cash flow. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses all sit outside the calculation, and they belong in your own analysis.
Second, 1.00 is where many select programs start, not a universal standard. Stronger ratios open better pricing and leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Eligibility depends on lender guidelines, credit profile, reserves, and property review.
Rate-and-Term vs. Cash-Out: Where the Programs Differ
Rate-and-term generally gets higher leverage and lighter seasoning than cash-out. The trade is that you receive no proceeds.
| Factor | Rate-and-Term | Cash-Out |
|---|---|---|
| Cash back to you | None | Yes |
| Typical leverage | Select programs up to 85% LTV | Around 75% (70% on short-term rentals) |
| Seasoning | Lighter, program-specific | About 6 months is common |
| Reserves | About 6 months PITIA; may be waived | About 6 months PITIA |
| Pricing | Generally lower | Generally higher |
Those figures are typical ranges across the network, not promises. A larger down payment on a purchase, or more equity on a refinance, can lower the payment and lift coverage. It never erases leverage caps, credit floors, reserve rules, or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage.
Credit works the same way across both. A 620 floor exists in parts of the network, most programs want around 660, and 700 or higher unlocks the strongest leverage tiers. Reserves vary by lender, leverage, loan size, and transaction type. Conservative rate-and-term files at modest leverage under $1,500,000 can see reserves waived, while loans above that size typically step up to about 9 months.
Loan sizes reach up to $3,000,000 on standard programs, with smaller balances available through select lenders on most programs. Above $2,500,000 the network generally holds to 30-year fixed structures.
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.
What Happens With the Prepayment Penalty?
A prepayment penalty is the first thing to check on any existing DSCR loan. It can turn a sensible refinance into a losing one.
The Reg Z definition of a prepayment penalty is a charge for paying principal before it is due. That definition comes from consumer-mortgage rules, and business-purpose DSCR loans are generally exempt from the consumer disclosure forms. The penalty is still a contractual fee, so the note itself is what governs.
Many programs use a step-down schedule, where the percentage falls each year you hold the loan. Some borrowers negotiate shorter schedules at origination, or pay extra to buy the penalty out. You have three basic options:
| Option | When it fits | Main risk |
|---|---|---|
| Pay it | Savings clearly exceed the fee | Higher up-front cost |
| Wait | The schedule steps down soon | Delay while the problem persists |
| Buy out | Lender allows it | Added cost for a lower fee |
The new loan will usually carry its own penalty too. Ask for the schedule before you commit, and compare the whole cost, not just the payment.
Does the Refinance Pay for Itself?
It pays when your cumulative savings exceed total costs. The reusable formula is:
Months to break even = (closing costs + any prepayment penalty) ÷ monthly savings.
Say your refinance saves a modest amount each month, and the penalty is a meaningful slice of the balance. The break-even stretches out, and a sale or a second refinance before that point loses money. Run the formula against how long you plan to hold the property.
Savings can also be structural rather than monthly. Escaping a balloon maturity, an adjustable reset, or a bridge loan comes with a different kind of value. The cost of not refinancing is a forced sale or a reset at worse terms. Tax treatment varies; consult a qualified professional.
When It Makes Sense, and When It Doesn’t
A rate-and-term refinance is a tool for specific problems. It is not a default move.
It makes sense when:
- A bridge or hard-money loan is maturing, and the property is stabilized with rent in place.
- An adjustable loan is about to reset and you want a fixed structure.
- The penalty has stepped down enough that the exit cost is small.
- A longer term or interest-only period would lift coverage on a thin file.
Skip it when:
- The penalty is high and the savings are small.
- You plan to sell soon, before the break-even point.
- You really want cash. In that case you are looking at a cash-out, and the 75% ceiling on standard rentals applies. Lendmire’s DSCR cash-out refinance page covers that path.
- Rent has softened and the new payment would leave coverage thin.
On files where an investor is exiting a bridge loan, the sticking point is rarely the rate and almost always the rent. A property that was renovated but not yet leased cannot show lease income. The appraiser’s market rent then carries the file, so a low rent estimate matters more than anything else on the checklist.
What Can Go Wrong?
Most problems show up in five places.
- Recharacterization to cash-out. Paying off an unrelated HELOC, rolling in other business debt, or taking even modest cash at closing can reclassify the file and reprice it. Keep the payoff exact.
- Low appraisal. A value below expectation raises LTV. You may need to bring cash to closing or accept a smaller loan.
- Low rent estimate. If market rent comes in under your leases, many programs use the lower figure. Coverage can slip below what you modeled.
- Rolled-in costs. Folding closing costs into the balance raises the payment and the LTV slightly. Check that coverage still clears after the roll-in.
- Entity and title issues. Moving a property into or out of an LLC during the refinance adds title and vesting steps. Settle the entity question before you apply.
When coverage falls short, structure is often the fix. That might mean a longer amortization, an interest-only period, or a sub-1.00 path through select lenders in the network, with leverage and terms adjusted. Whether any of these fit depends on lender guidelines, credit approval, and property review.
How Does This Change for Short-Term Rentals?
The mechanics stay the same, but the income test and the leverage differ. Short-term rentals typically want a 640 or higher score and about 12 months of hosting history. Refinance leverage generally runs around 70%. Income may be documented through a market-rent appraisal or trailing revenue, depending on the program.
Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income.
Some property types sit outside these programs entirely. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered through the network’s DSCR programs.
Frequently Asked Questions
Can I refinance an existing DSCR loan?
Yes. A DSCR loan can be refinanced into a new DSCR loan or another product. The new loan is reviewed fresh, with a new appraisal, a rent determination, and a coverage test. The main cost to weigh is any prepayment penalty on the old loan.
Does a rate-and-term refinance need a new appraisal?
Yes, in most cases. The appraisal sets the value for LTV and supports the rent figure used for coverage. Programs differ on details, so ask which rent method the lender will use.
Can I roll closing costs into the new loan?
Often yes, but it raises the balance and the payment, which lowers coverage. It can also push LTV higher. Recheck the ratio with the costs included, and keep the file clean so it stays a rate-and-term transaction.
Will it matter if I take a little cash back?
Yes. Even a modest amount, or paying off an unrelated debt, can reclassify the loan as cash-out. That means a lower leverage ceiling and different pricing, so plan the payoff to the dollar.
Can I change the borrowing entity during the refinance?
Sometimes. Moving a property into or out of an LLC is possible on many programs, subject to lender program eligibility. It adds title and vesting steps, so raise it at the start of the file.
Ready to Compare Your Options?
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 mortgage broker arranging DSCR financing through select lenders in its wholesale network, across 41 markets including Washington, D.C. Approval is subject to lender guidelines and underwriting, and nothing here is a commitment to lend. Reach the team at 828-256-2183, or request a quote through the mortgage quote page.
About Lendmire
Lendmire — NMLS# 2371349 — is a DSCR and non-QM mortgage brokerage with investor loan programs in 41 markets, including Washington, D.C. DSCR eligibility is commonly reviewed by the lender around property-level rent rather than personal income documentation, subject to lender guidelines, and the brokerage helps arrange financing for LLC-owned portfolios beyond conventional financed-property limits. Recognized by Scotsman Guide as a Top Mortgage Workplace in 2025 and 2026.
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References
1. Yahoo Finance: rate-and-term refinance explainer
2. NerdWallet: home equity loan vs. cash-out refinance
3. CFPB: Regulation Z, section 1026.37
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: 30-Year vs. 40-Year DSCR Term: Which Is Better · DSCR Cash-Out Refinance vs HELOC on a Rental · Can a Short-Term Rental Get a Cash-Out Refinance on Airbnb Income?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.