The Quick Read: The fee is a prepayment penalty written into your existing loan, and a cash-out refinance triggers it because the new loan pays the old one off. The amount is the schedule percentage for your current loan year, multiplied by the unpaid balance at payoff, and the title company takes it out of your proceeds before you see a dollar of cash.
- The fee is charged on the balance you still owe, not the original loan amount.
- Common shapes are a step-down (such as 5-4-3-2-1), a flat percentage, or six months of interest.
- The fee reduces your net cash. It never enters the coverage ratio itself.
- Once the penalty window on the old loan ends, the fee is zero.
- Your note and prepayment rider decide everything, so read them before you plan the refinance.
Key Terms Defined
Exit fee: Another name for a prepayment penalty. It is a contract fee for paying off the loan early.
Prepayment penalty: A charge in the note that applies if you pay the loan off inside a set window, usually by sale or refinance.
Unpaid balance (payoff balance): The principal you still owe on the day of payoff. The fee is calculated on this number.
Step-down: A schedule where the percentage falls each year, such as 5%, 4%, 3%, 2%, 1%, then zero.
Hard versus soft penalty: A hard penalty applies to any early payoff. A soft penalty typically waives the fee on a sale but still charges it on a refinance.
DSCR (debt service coverage ratio): Monthly rent divided by the full monthly housing payment: principal, interest, taxes, insurance, and any HOA dues. DSCR loans qualify primarily on property-level rental income covering the payment, subject to lender guidelines.
Cash-out refinance: A new loan, larger than the old balance, that pays off the old loan and returns the difference to you as cash.
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 29, 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 29, 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.
Does a Cash-Out Refinance Really Count as a Payoff?
Yes. A refinance is a payoff. The new lender sends money to the old lender, and the old note is satisfied. That payoff is the trigger. You do not have to miss a payment, sell the property, or write a check from your own pocket.
This catches investors off guard because “cash-out” sounds like a product that sits on top of your loan. It does not. It replaces your loan. Whatever your old note says about early payoff now applies.
Across the wholesale network of DSCR lenders Lendmire works with, most investor loans carry some form of prepayment penalty. No-penalty options exist, but they are priced differently, usually with higher pricing or fees. Investors often accept the penalty at origination to get better terms. The cost shows up later, when they refinance.
Which events trigger the fee depends on the note. This is the usual pattern:
| Event | Fee usually triggered? |
|---|---|
| Cash-out refinance | Yes, inside the window |
| Rate-and-term refinance | Yes, inside the window |
| Sale (hard penalty) | Yes |
| Sale (soft penalty) | Usually waived |
| Full payoff with your own cash | Yes |
| Payoff after the window ends | No |
| Second lien beside the old loan | No payoff, so no trigger |
A second lien leaves the first loan in place, so nothing gets paid off. That is a different product with its own costs, and it is outside the scope of this article.
What Shapes Do Exit Fee Schedules Take?
Most schedules fall into a few shapes. The penalty has two parts: how long it lasts and how much it charges. Windows commonly run up to five years, with shorter options of one to four years also available.
- Step-down. The most common shape. A 5-4-3-2-1 schedule charges 5% of the balance in year one, 4% in year two, and so on, reaching zero after year five. A 3-2-1 schedule is the shorter version.
- Flat percentage. The same percentage applies for the whole window.
- Six months of interest. Often paired with an allowance that lets you pay down part of the principal each year without a charge.
- Yield maintenance. A formula-based penalty. It is rare in this space.
Some structures never reach zero inside the term, so check the final year of the schedule, not just the first.
You often have a choice at origination. A longer or heavier penalty usually comes with better pricing. A shorter penalty, or none, usually costs more through pricing or fees. Neither is “right.” It depends on how soon you expect to refinance. Many investors who plan to recycle capital build the shorter window into the deal from day one.
How Is the Fee Calculated on a Cash-Out?
The formula is simple: schedule percentage for your loan year × unpaid balance at payoff.
The key detail is which balance. It is the old loan’s payoff balance, not the original loan amount and not the new, larger cash-out loan. The new balance only matters for your next exit.
Thirty-year loans amortize slowly. In the first few years, the balance barely drops. So the fee is close to the percentage times what you borrowed, even though the penalty percentage itself is falling.
Here is a modeled illustration, not a market figure. Per $100,000 of payoff balance:
- A 4% fee in year two costs $4,000.
- A 2% fee in year four costs $2,000.
- After the window ends, it costs nothing.
Scale that to your own balance. Pay the old loan off in year two instead of year four, and you give up two extra points of your balance.
Find Your Number: Five Steps
1. Pull your note and prepayment rider. The rider controls, not general rules.
2. Identify the schedule. Step-down, flat, or interest-based.
3. Count your loan year. Timing runs from the existing note date, not from when you bought.
4. Request a payoff statement showing the exact penalty at your planned refinance date.
5. Multiply and subtract. Fee percentage times payoff balance, then deduct it from your expected cash.
How Does the Fee Reach Your Closing Table?
The fee appears as a line on the payoff statement for the old loan. The title or escrow company collects it from the new loan’s proceeds when it wires the payoff. You never write a separate check.
The result: your cash-out is net of the penalty. If you were counting on a certain check, the fee comes off the top, along with the old balance and your closing costs.
The equity you can reach is capped before the fee even enters. Across most of the network, a cash-out refinance on a standard rental tops out around 75% LTV (loan-to-value, the loan as a percentage of the property’s value). A cash-out on short-term-rental collateral tops out around 70%. About six months of ownership seasoning is the common expectation, measured from title recording. Then rent used for lender review, the full monthly payment, and reserves (commonly around six months of PITIA, the payment including taxes and insurance) all affect what you can actually pull. The fee sits on top of all that and reduces what lands in your account. All figures are subject to lender guidelines and vary by borrower, property, and loan scenario.
Two Clocks: Old Loan and New Loan
Two penalty clocks run in a cash-out. The old loan’s clock ends when you pay it off, and you settle that fee at closing. The new loan usually carries its own penalty window, starting at its own closing.
So a cash-out can solve one penalty and begin another. For now, remember to pick the new loan’s structure with your next refinance in mind.
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.
Does the Fee Change Your DSCR?
No, the fee itself never enters the ratio. DSCR compares rent to the monthly payment, and a one-time payoff cost is not part of the payment.
The larger balance is a different story. A cash-out loan is bigger than your old one, so the payment goes up, and coverage falls unless rent rises with it. Plan to clear the lender’s coverage floor on the new loan. Many select programs start at 1.00. A separate select-lender path takes coverage below 1.00 with leverage and terms adjusted. Stronger ratios open better pricing and leverage.
One more caution. Clearing 1.00 does not mean the property produces positive cash flow. Repairs, vacancy, management, utilities, and capital expenses sit outside the calculation.
Wait, Pay, or Restructure?
The decision comes down to the fee versus the value of the cash. A short table lays out your options:
| Option | What you gain | What you give up |
|---|---|---|
| Cash out now | Equity now | Full fee at today’s step |
| Wait for next step-down | Smaller fee | Delayed use of the cash |
| Wait for window to end | No prepayment fee | Longest delay |
| Pick shorter/no penalty next time | Flexibility | Higher pricing or fees |
Run the break-even honestly. Compare the fee against what the cash earns you: a down payment on the next rental, a rehab that lifts rent, or debt you retire. If your next step-down is close, waiting can save real money. If a deal is waiting on the cash, the fee is simply the cost of moving.
Also compare the fee against what the refinance changes about your overall loan terms. A lower payment bought with a long penalty can turn into the more expensive loan if you refinance early to pull equity. Investors who expect to recycle equity should weigh that before choosing a penalty at origination.
Where the General Rule Breaks
Your note controls, but several edge cases change the answer.
State law. A prepayment penalty is mainly a contract term, and state law shapes it. Residential prepayment limits often carve out business-purpose loans, according to the American Association of Private Lenders. The carve-out is not total. Restrictions can still vary by property type, occupancy, and timing. California’s Civil Code limits prepayment charges on certain loans, including a five-year window and a six-months’-interest cap on amounts prepaid above 20% in twelve months. Pennsylvania’s regulation on residential mortgages restricts penalties on one- to two-unit properties. Whether a limit applies to your loan, especially when the borrower is an LLC (subject to program terms), often turns on genuine business purpose. Ask the lender or an attorney rather than relying on a state list.
Property size. Multifamily of five or more units often sits outside residential-style limits. Verify your state and unit count.
Soft penalties. A soft penalty typically waives the fee on a sale but not a refinance. Since cash-out is a refinance, a soft penalty does not protect you.
Partial paydowns. The fee can apply to principal paid down early, and some notes allow a free annual allowance. Check the note.
Same-lender refinance. Some lenders reduce or waive the penalty when you refinance into their own product. Do not assume it. Just ask.
Bridge or hard-money exit fees. These are a different charge, usually a percentage owed when a short-term loan is repaid. This article covers the prepayment penalty on a long-term DSCR note.
Ineligible property types. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered in the network’s DSCR programs, so there is no cash-out to price on them.
What a Broker Sees in Practice
On cash-out files, the fee surprises investors more than almost any other line. They remember the rate and the payment from origination. They forget the rider. The cleanest files start with a payoff statement pulled before the investor commits to a number, because the net proceeds then match what the lender and title company will actually show. Pull that statement early, and the equity you plan around is the equity you receive.
Lendmire’s complete DSCR loans guide covers the wider picture of how these loans are structured. For the exit-fee question, the practical rule is short: read the rider, count the loan year, and request the payoff figure.
Frequently Asked Questions
Does a cash-out refinance always trigger the fee?
Only if the penalty window on the old loan is still open. If the window has ended, the fee is zero. If it is open, the refinance counts as a payoff and the schedule percentage applies, whether the loan is hard or soft.
Is the fee based on my original loan amount?
No. It is based on the unpaid balance on the day of payoff. Because 30-year loans pay down slowly early on, that balance is usually close to the original amount in the first years.
Does the fee come out of my cash?
Yes. The title or escrow company deducts it from the new loan’s proceeds when it pays off the old loan. It shows as a line on the payoff statement, and your net cash is lower by that amount.
Can I avoid the fee?
You can time the refinance after the window closes or after a step-down. You can also negotiate the structure at origination, though shorter or no-penalty options usually cost more through pricing or fees. Asking whether a same-lender refinance reduces the fee is also reasonable.
Does the fee lower my DSCR?
No. The fee is a one-time payoff cost and does not enter the ratio. The larger balance on the new cash-out loan can lower coverage, so check that the new payment still clears the lender’s floor.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker that arranges DSCR investor loans through select lenders in its wholesale network, across 41 markets including Washington, D.C. 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. Program details are subject to lender guidelines and are not a commitment to lend. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
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References
2. California Civil Code, prepayment charge provisions
3. Pennsylvania Code, 10 Pa. Code Chapter 7
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 Much a Jumbo DSCR Refinance Lends on a Former Home · DSCR Cash-Out Refinance vs Bridge Loan on a Fourplex · DSCR Delayed Financing vs Seasoned Cash-Out for a Cash Buyer
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.