The Quick Read: A three-year step-down never shrinks the equity left in the property. It shrinks the cash in your hand, because the fee comes out of proceeds at closing. On a standard rental, the new loan tops out near 75% of value, so roughly a quarter of the value stays put.
- The fee is a percentage of the old loan’s unpaid balance, not the original amount.
- The fee is paid from proceeds, so it lowers your check but not your remaining equity.
- On a standard rental, cash-out lending tops out around 75% of value, so equity left is about 25% before anything else.
- A new loan usually starts a new penalty clock.
- Timing the refinance around the next tier is often worth more than any other lever.
Most investors ask the wrong question here. “Will the penalty eat my equity?” has a clean answer: no. The better question is how much cash survives the fee, the closing costs, and the payoff. The sections below walk through that arithmetic, then show where it breaks. For the broader program picture, see the complete DSCR loans guide.
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
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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.
Key Terms Defined
- Step-down penalty: A prepayment fee that shrinks each year. A 3-2-1 charges 3% of the balance if you pay off in year one, 2% in year two, 1% in year three, and nothing after.
- Unpaid balance: What you still owe on the day of payoff. It is usually the fee’s base, not the original loan amount.
- Cash-out refinance: A new, larger loan that pays off the old one and hands you the difference.
- LTV (loan-to-value): The loan divided by the property’s appraised value.
- DSCR (debt service coverage ratio): Monthly rent divided by the full monthly obligation: principal, interest, taxes, insurance, and any HOA dues. That obligation is called PITIA.
- Seasoning: The ownership period a lender wants before it will cash you out.
- Payoff statement: The lender’s written demand showing principal, accrued interest, and any penalty.
- Hard versus soft penalty: A hard penalty applies on any early payoff. A soft one usually waives the fee on a sale but not on a refinance.
What a Three-Year Step-Down Actually Charges
The fee equals the tier percentage times the balance on payoff day. Nothing more exotic than that. Year one is 3%, year two is 2%, year three is 1%, then zero.
Two details matter. First, the base is the unpaid balance. As the loan amortizes, the same percentage costs a little less each year. An interest-only loan never pays principal down, so its fee base stays high. Extended terms and interest-only periods are available through select lenders in the network, and both change how fast the balance moves.
Second, the clock usually starts at the note date or the first payment date. The note and its prepayment rider control, so confirm which one before you count months.
A cash-out refinance counts as a payoff. The old lender does not care that you are borrowing again. The fee is due.
The Equity-to-Cash Waterfall
Equity left equals the new value minus the new loan. The penalty never touches that formula. It touches cash, because the payoff, the fee, and closing costs all come out of the new loan’s proceeds before you see a dollar.
Here is a modeled walkthrough in percentages of appraised value. The inputs are assumptions, not market data: an old balance at 60% of value, a standard rental, and closing costs at 2% of value.
| Step | Share of value |
|---|---|
| Appraised value | 100% |
| New loan at 75% LTV (standard-rental cash-out) | 75% |
| Less old payoff balance | 60% |
| Less penalty (tier × 60%) | 0% to 1.8% |
| Less closing costs (assumed) | 2% |
| Net cash to you | 11.2% to 13% |
| Equity left in property | 25% |
The bottom row is the point. Whatever tier you land in, equity left is 25% of value. Only the cash row moves.
One caveat on the 75%. It is the ceiling across most of the network for standard rentals. On short-term-rental collateral, cash-out tops out at 70%, so equity left rises to 30% and your check shrinks. Lenders in the network typically also want about 6 months of ownership before cashing you out, subject to lender guidelines.
The Same Refinance in Four Exit Years
Run the identical property through each tier and the pattern is plain. The balance is held flat here for clarity. In real life it amortizes slightly, so later fees run a touch lower.
| Exit timing | Tier | Fee (% of value) | Net cash (% of value) | Equity left |
|---|---|---|---|---|
| Year one (after seasoning) | 3% | 1.8% | 11.2% | 25% |
| Year two | 2% | 1.2% | 11.8% | 25% |
| Year three | 1% | 0.6% | 12.4% | 25% |
| After year three | 0% | 0% | 13.0% | 25% |
Refinancing in year one instead of waiting past year three costs 1.8 points of value in cash. That is roughly 14% of the check. Meaningful, not catastrophic. The same fee on a thinner-equity file is a different story, which the scenarios below show.
What Resets and What Doesn’t
The old fee gets paid once, at payoff, and then it is gone. The new loan, though, normally carries its own schedule. Your three-year clock restarts at the top tier on the bigger balance.
That has a practical consequence. If you plan to sell or refinance again soon, the new loan’s year-one tier will be waiting for you. Price that in now, not later. Some structures are lighter or carry no prepayment charge at all, usually in exchange for different pricing. A longer hold generally justifies accepting the heavier schedule for better pricing.
Hard versus soft matters here. Nolo explains the distinction: soft penalties typically excuse a sale but still bite on a refinance. A cash-out is a refinance. A soft label does not rescue you.
One short note on why these schedules can be this size. 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. For contrast, federal consumer-mortgage rules limit penalties to three years and cap them at 2% in years one and two and 1% in year three, per the CFPB’s rule text, also available from Cornell’s Legal Information Institute. A DSCR 3-2-1 is not bound by that cap. Its year-one 3% sits above it. That contrast is context, not a protection you can lean on.
Refinance Now or Wait?
Waiting wins when the next tier is close and nothing time-sensitive depends on the cash. Refinancing now wins when the cash will earn more than the fee, closing costs, and added debt service combined. Run both numbers before you order an appraisal.
| Situation | Lean | Why |
|---|---|---|
| Next tier is a few months out, no urgent use for cash | Wait | Fee drops by a third or half |
| A deal needs the cash and returns clearly exceed the fee | Refinance now | Fee is a one-time cost |
| Fee is over a third of net cash | Size down or wait | Fee is eating the purpose |
| Already past the last tier | Proceed | No old fee |
| Rent is rising and value is climbing | Weigh both | Waiting may lift the check |
A wry truth: the fee is the only cost in this process you can fully predict. Rent lost, value drift, and a missed purchase are guesses. Compare them honestly. Waiting a few months can be worth more than any pricing improvement, but only if the opportunity you are waiting past is not worth more than the fee.
Ways to Keep More Equity
Equity left is mostly a leverage choice. The fee is only a cash choice. So the levers split in two.
To keep more equity in the property, borrow less than the ceiling. A smaller cash-out also shrinks the new loan’s future fee base and lifts coverage. Stronger credit tiers (many programs want around 660, and 700+ opens the strongest leverage) can unlock better terms, but the 75% cap holds regardless.
To keep more cash, time the payoff. Check whether the note allows a yearly partial paydown without a fee, which some notes do and others treat differently. A rate-and-term refinance at up to 85% LTV returns no cash, so it suits investors who want a lower balance or a cleaner structure rather than proceeds. That ceiling is for rate-and-term only. A refinance that returns cash falls under the 75% line. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Where the Rule Breaks
The general rule is: fee reduces cash, not equity. These edge cases bend it.
Thin equity. If the old balance is close to the 75% ceiling, gross proceeds are small. The fee and closing costs can exceed them. Then you bring cash to closing, or you skip the refinance.
Coverage caps the loan before LTV does. The new loan is larger, so coverage falls. A file near 1.45x on the old loan might land closer to 1.15x–1.2x after a full cash-out (a modeled estimate, since taxes and insurance do not scale with the balance). Many select programs start at a 1.00 floor. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Either way, lenders want enough equity and enough rental coverage. Remember too that clearing 1.00 is not positive cash flow. Repairs, vacancy, management, and capex sit outside the ratio.
The fee is not in the ratio. It is a closing cost. The bigger loan lowers coverage, not the fee.
Reserves. Lenders commonly want about 6 months of PITIA in reserve, stepping up to about 9 months on loans above $1,500,000. Cash you net can sometimes help, but the amounts vary by lender, leverage, and loan size.
Business-purpose status. “Investment property” is not a magic label. The loan’s purpose controls, as Compliance Alliance notes when it says non-owner-occupied rental credit is generally treated as business purpose. Owner-occupied situations depend on unit count and use of proceeds.
State law. Some states restrict prepayment penalties, even on investor loans. There is no safe universal answer. The note controls, and you should confirm state limits before relying on any schedule.
Entity borrowers. Loans to an LLC are available, subject to lender program eligibility. The fee works the same way.
Property types. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered through the network’s DSCR programs, so no schedule math applies to them.
If the collateral is a short-term rental, the leverage and history rules differ. Lendmire’s piece How Much a DSCR Cash-Out Lends on Under a Year of Airbnb History covers that ground.
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.
Three Scenarios in Percentages
All three use modeled inputs, a standard rental at 75% LTV, and closing costs of 2% of value. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Strong equity. Old balance is 45% of value, exiting in year three. Fee: 1% × 45% = 0.45% of value. Gross proceeds are 30%. Net cash lands near 27.5%. The fee barely registers. Equity left is 25%.
Thin equity. Old balance is 72% of value, exiting in year one. Fee: 3% × 72% = 2.16% of value. Gross proceeds are only 3%. Fee plus closing costs total about 4.2%. The borrower is short about 1.2% of value. Not workable as structured. Wait for a lower tier, or skip it.
Fee-dominated. Old balance is 65% of value, exiting in year one. Fee: 1.95% of value. Gross proceeds are 10%. Net cash is about 6.05%. Wait until after year three and net cash rises to 8%. The wait is worth about 1.95 points of value. Whether that justifies the delay depends on what the cash will earn in the meantime.
For a view of how much equity is left for a down payment on the next rental, see Lendmire’s piece How Much Equity a Cash-Out Refinance Leaves for a Rental Down Payment.
Check Your Note Before Setting a Date
Pull the payoff statement and the prepayment rider. Then confirm five things:
1. Whether the clock starts at the note date or the first payment.
2. Whether the percentage applies to the unpaid balance or something else.
3. Whether the penalty is hard or soft.
4. Whether any partial-paydown allowance exists.
5. Which events count as a payoff.
Then size the new loan, subtract the old payoff, the fee, and closing costs, and see what is left. If the answer is smaller than the purpose of the cash-out, wait.
Frequently Asked Questions
Does a prepayment penalty reduce my equity?
No. Equity is value minus debt, and the new loan size sets it. The fee reduces your cash proceeds because it is paid at closing from the loan funds. If proceeds cannot cover it, you bring cash or take a smaller loan.
Does the old step-down carry over to the new loan?
Typically not. The old loan is paid off, and the new loan usually starts its own schedule at the top tier. Read the new rider before you close, because the structure may be lighter, heavier, or absent.
Is the fee based on the original loan amount?
Usually it is based on the unpaid balance on payoff day. Notes can differ, so confirm the calculation basis in the rider and on the payoff statement.
Does the penalty lower my DSCR?
No. It is a one-time closing cost. The larger new loan lowers coverage, and the ratio is tested on the new monthly obligation against rent used for lender review.
What if I’m inside the first year?
Cash-out typically requires about 6 months of ownership, measured from title recording, on most programs in the network. If you clear seasoning inside year one, you pay the top tier. Compare that fee against waiting for the next step.
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. Programs are reviewed individually, subject to lender guidelines, and nothing here is a commitment to lend.
Every step-down is a countdown, and a more affordable day to pull equity is usually the first day after the last tier.
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire is a non-QM mortgage brokerage (NMLS# 2371349) arranging DSCR investor loans in 41 markets, including Washington, D.C. DSCR eligibility is generally reviewed around property-level rental income rather than personal income, subject to lender and program guidelines, a fit for self-employed investors and LLC-owned portfolios. Lendmire was recognized as a Scotsman Guide Top Mortgage Workplace in 2025 and 2026.
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References
1. Nolo, When Are Prepayment Penalties Allowed on New Mortgages
2. CFPB, Regulation Z §1026.43
3. Cornell LII, 12 CFR 1026.43
4. Compliance Alliance, Regulation Z and Investment Properties
This article is part of Lendmire’s investment property cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Choose a DSCR Cash-Out or HELOCs on Paid-Off Rentals · How Much a DSCR Cash-Out Pays Toward a Divorce Buyout · Should a Condo Owner Use a Second Lien Instead of DSCR Cash-Out?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.