The Quick Read: Price every cost of leaving the old loan before you apply. The payoff, any prepayment penalty, and your new closing costs all come out of the same closing. Pull the note, request a written payoff statement, and run a break-even before you commit.
- The prepayment penalty is usually the largest old-loan cost, and your note sets it.
- A penalty is generally figured on the balance you are repaying, so it shrinks as the schedule steps down.
- Financing the costs into the new loan raises leverage and the monthly payment, which lowers coverage. Paying cash drains your reserves.
- A cash-out refinance on a standard rental tops out around 75% LTV across most of the network, so payoff plus costs must fit under that cap.
- Closing just after a step-down date can save a full percentage point of the balance on a typical step-down schedule.
What Counts as an Old Loan Cost?
Four things count. The first is the prepayment penalty on the old note. The second is the payoff itself, including interest that has built up since your last payment. The third is leftover costs from the old loan that you have not yet written off. The fourth is the closing cost of the new loan, which gets mixed up with the other three.
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Search results blend “costs of the new loan” with “costs of the old loan.” Keep them apart. The old-loan costs decide whether refinancing makes sense at all. The new-loan costs decide how much cash you bring or how much you borrow.
| Cost | Where to find it | How it gets paid |
|---|---|---|
| Payoff balance | Payoff statement | Wired from new loan proceeds |
| Accrued interest | Payoff statement, per-day figure | Added to the payoff |
| Prepayment penalty | Note or rider, payoff statement | Added to the payoff |
| Old escrow balance | Servicer account history | Refunded to you after payoff |
| Unwritten-off old fees | Old closing statement | Handled in your tax records |
| New closing costs | Lender’s itemized cost quote (business-purpose DSCR loans are exempt from TRID under Reg Z 1026.3, so no standard Loan Estimate is required) | Cash, financed, or priced in |
Investors often skip the escrow line because the money comes back to them. It is real money, but it arrives after closing. Do not count it toward cash needed at the table. Many DSCR loans carry no escrow at all, though that varies by program.
The structure of this article follows the order of operations. First comes the penalty, then the payoff number, then the break-even. After that comes how the costs land on the new file. Lendmire’s complete DSCR loans guide covers the broader program, so this piece sticks to the old-loan side.
Key Terms Defined
Prepayment penalty: a fee written into your note that applies when you pay the loan off before a set date.
Payoff statement: a written figure from your current servicer showing exactly what it takes to close out the old loan on a given date.
Per diem: the daily amount of interest that adds to your payoff for each day the old loan stays open.
PITIA: principal, interest, taxes, insurance, and any association dues, which together make up the monthly payment that rent must cover.
DSCR: the debt service coverage ratio, which compares a rental’s monthly rent to its PITIA.
Reserves: liquid funds you hold after closing, usually counted in months of PITIA.
LTV: loan-to-value, the new loan balance divided by the property’s appraised value.
Break-even: the number of months of savings it takes to pay back what the refinance cost you.
Does a Refinance Trigger the Prepayment Penalty?
Yes, in most cases. A refinance pays off the old loan, and a payoff is what a penalty is written to catch. The CFPB’s consumer guidance on prepayment penalties describes the fee as something charged when you pay off all or part of a mortgage early. It typically applies on a full payoff, such as a sale or a refinance, within a set window. Small extra principal payments usually do not trigger it.
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. Whether a prepayment penalty applies is governed by the note itself, along with any state law that applies.
Some states restrict prepayment penalties on investment property. The restrictions vary, so confirm the rule for your state before you assume a penalty is enforceable or unenforceable.
Step-down, flat, and other penalty structures
Penalties come in a few shapes. You need to know which one your note uses before you can price it.
- Step-down: the fee is a percentage of the balance you repay, and it falls each year. A 5-4-3-2-1 schedule charges 5% in year one, 4% in year two, and so on. A 3-2-1 schedule runs for three years.
- Flat percentage: one fixed percentage applies for the whole window.
- Months of interest: the fee equals a set number of months of interest on the balance, such as six.
- Yield maintenance: the fee compensates the lender for lost interest income. It is less common on DSCR files and can run well above a step-down fee.
The fee is generally charged on the balance you are repaying, not the amount you originally borrowed. That is why a loan you have paid down for a few years costs less to exit than the original number suggests.
Soft versus hard penalties
A soft penalty applies when you refinance but not when you sell. A hard penalty applies to any payoff. Your note will say which one you have. If you plan to sell the property rather than refinance, a soft penalty may never come into play.
The rate-for-flexibility trade
A loan with no penalty, or a shorter one, usually costs more somewhere else, in pricing or fees. A shorter step-down can be worth that cost if you expect to refinance or sell early. If you expect to hold for many years, the penalty may never matter, and the cheaper structure is usually the smarter pick. Which structures are available varies by lender and program, so ask what each option does to the terms before you choose.
How to Handle Old Loan Costs When You Refinance, Step by Step
Work through these steps in order. Each one narrows the number you are trying to find.
1. Pull the note and any prepayment rider. Find the penalty type, the window length, and the start date. Some schedules start on the note date and others on the first payment date. A difference of a month can move you into a lower penalty tier.
2. Request a written payoff statement. It should itemize principal, interest through the expected payoff date, any penalty, and fees. Ask for the per-diem figure so you can adjust if the closing date moves.
3. Check the penalty against the note. Do the math yourself with the schedule in the note. Servicers can apply the wrong tier, and an error here is worth catching before closing.
4. Pick the refinance type. A rate-and-term refinance pays off the old balance, interest, and costs. A cash-out refinance returns more than that.
5. Run the break-even and the wait-or-go comparison in the next section.
6. Confirm the new file works. The rent has to cover the new payment, and the loan has to fit the leverage cap for its transaction type.
The payoff statement is not a one-time document. Interest accrues daily, so the figure changes with the closing date. If closing slips, ask the servicer for a new statement.
Escrow refunds follow the servicer’s process after payoff. Request the refund in writing and keep your own copy. Consumer-mortgage rules set timelines for servicers, but those rules may not extend to a business-purpose note. The timing then depends on the note and the servicer’s practice.
How Do You Run the Break-Even?
The formula is simple. Add the new closing costs and the old-loan penalty. Divide by your monthly savings from the refinance. The result is the number of months it takes to recover the cost.
Say the combined costs equal ten months of your monthly savings. Your break-even is ten months. If you plan to hold or keep the new loan well past that point, the refinance pays for itself. If you may sell or refinance again sooner, it does not.
Savings can come from a lower monthly payment, from a longer term, or from pulling cash out for another purchase. Count only the savings that last. A temporary dip in the payment is not a savings you can bank for the full hold period.
Here, the question is narrower. Is the old-loan cost small enough that you should go now, or large enough that you should wait?
Wait or go?
A step-down schedule gives you a free option. If you are close to the next tier, waiting can cost less than refinancing now.
| Choice | Best when | Watch for |
|---|---|---|
| Go now | Savings are large and the break-even is short | Penalty may be at its highest tier |
| Wait for step-down | A tier drops within a few months | Savings you give up while waiting |
| Wait out the full window | Savings are modest | Property or tenant changes meanwhile |
Closing after a step-down date can lower the prepayment penalty on a standard schedule, since the penalty is often a percentage of the balance. On a larger balance, that difference can be meaningful. It is worth checking the date before you commit to a closing, and timing will vary by file and lender.
Timing also matters for a refinance shortly after a purchase. Refinancing within the first year of a loan collides with year one of the penalty. Investors who plan to buy, improve, and refinance should read their prepayment terms before they sign the first loan, not after.
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.
How Do Old Costs Show Up at Closing?
They show up as payoff items on the settlement statement. The title company wires the payoff to your old servicer from the new loan’s proceeds. The penalty, accrued interest, and any fees ride along with it. If proceeds do not cover everything, you bring cash to close the gap.
You have three ways to handle the new loan’s closing costs:
- Pay cash. Your loan balance stays lower, but your reserves drop.
- Finance them into the balance. Your cash stays put, but the loan gets bigger.
- Take a lender credit. The costs are built into the loan’s pricing, so you pay them over time instead of at closing.
A refinance advertised as zero out of pocket does not remove the costs. They are financed or priced in. The cost moves from the closing table to the monthly payment.
What it does to your coverage and leverage
Rolling costs into the loan raises the balance. A larger balance raises LTV and the monthly payment. A higher payment lowers your DSCR.
Most programs the network places files with want to see coverage of at least 1.00, meaning the rent covers the full monthly payment. 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. A financed penalty can push a file from one tier to the next.
Leverage caps also bind. A cash-out refinance on a standard rental tops out around 75% LTV across most of the network. On short-term-rental collateral, the cash-out ceiling is 70%. The payoff, penalty, and any financed costs all have to fit under that cap. If they do not, you bring cash or you skip the cash-out. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Clearing 1.00 does not mean the property cash flows. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses sit outside the ratio. A property can clear the test and still lose money after those costs.
Reserves and the cash you leave behind
Reserves vary by lender, leverage, loan size, and transaction type. They commonly run around 6 months of PITIA. Conservative rate-and-term files at modest leverage under $1,500,000 can see reserves waived, and larger loans typically step up to about 9 months.
Paying a penalty in cash can shrink the pool of funds that counts toward those reserves. Plan for the reserve requirement after you subtract the payoff costs, not before. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Credit still matters too. A 620 score is the floor in parts of the network. Most programs want around 660, and 700 or higher unlocks the strongest leverage tiers.
Investors tend to price the new loan carefully and then find the old-loan penalty late. Getting the payoff statement first avoids that surprise.
Does the Old Loan Type Change the Answer?
Yes. The type of loan you are leaving decides which costs you should expect. The note is always the final word, so read it before you assume.
| Old loan type | What to check in the note |
|---|---|
| Conventional investor loan | Whether any penalty applies at all |
| Existing DSCR loan | Penalty type, window, and start date |
| Portfolio loan | Custom terms, possible fees on exit |
| Short-term or bridge loan | Minimum interest or exit fees |
Short-term loans used for purchases and rehabs often carry their own exit terms. Check for minimum interest periods and exit fees, not just a penalty line.
If you own a property that cannot be financed through the network’s DSCR programs, no payoff plan fixes that. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered in the network. Know that before you spend money on a payoff statement.
What Does the New Loan’s Clock Look Like?
The new loan starts its own prepayment clock. The old penalty is the cost of leaving this loan. The new penalty is the cost of leaving the next one. Choose the new structure to match how long you plan to hold.
The spine of the network’s DSCR offerings is the 30-year fixed. Extended terms, such as 40 years, and interest-only periods are available through select lenders in the network. ARM structures exist for investors who want them. Loans above $2,500,000 generally stay with 30-year fixed structures.
Loan sizes reach up to $3,000,000 on standard programs, with smaller balances available through select lenders on standard programs. Qualification runs primarily on property-level rental income covering the payment, subject to lender guidelines. Your personal income is not the main test, but credit, reserves, and the property all still count.
Match the penalty to your plan. If you expect to sell or refinance within a few years, a shorter schedule can be worth a small cost elsewhere. If you plan to hold for a decade, a longer schedule that costs less today may be the better pick.
Mistakes and Myths to Skip
- Assuming a federal cap protects you. Your note and your state’s law set the penalty on a business-purpose loan.
- Assuming a refinance is not a payoff. It is. The penalty is typically triggered.
- Figuring the penalty on the original loan amount. It is generally figured on the balance being repaid.
- Believing zero out of pocket means zero cost. The costs are financed or priced in.
- Counting the escrow refund as cash at closing. It arrives later, on the servicer’s schedule.
- Treating a no-penalty loan as free. It usually costs more in pricing or fees.
- Ignoring the new loan’s penalty. It becomes your next exit constraint.
What to Gather Before You Apply
Collect the note and any prepayment rider, the old closing statement, the latest payoff statement with the per-diem figure, and a recent mortgage statement. Add your lease and any rent history for the property, along with your insurance details.
Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records, review IRS Publication 527, and speak with a qualified tax professional before relying on any deduction.
Frequently Asked Questions
Do I pay a prepayment penalty if I refinance my rental property?
Usually yes, if your note includes one and you are still inside its window. A refinance pays off the old loan, which is what the penalty is built to catch. If the penalty is soft, it may apply to a refinance but not a sale. Read your note and request a payoff statement to see the exact figure.
Can I roll the old penalty into the new loan?
Often yes, as long as the new loan stays within its leverage cap and the rent still covers the payment. Financing the penalty raises the balance and the payment, which lowers your coverage ratio. Everything has to fit under that cap.
What if the payoff changes before closing?
It will, because interest accrues daily. Ask your servicer for the per-diem amount and a new statement if the closing date moves. The title company wires whatever the current statement says, so an outdated figure can leave a shortfall.
Is it better to wait for the next step-down date?
Sometimes. If a lower penalty tier is a few months away and your savings from refinancing are modest, waiting can cost less. Run the break-even both ways. Compare the penalty you would save against the monthly savings you would give up while you wait.
Do old loan costs affect my DSCR?
Only if they are financed into the new loan. A larger balance means a larger payment, which lowers coverage. Paying the costs in cash leaves coverage unchanged but reduces your reserves.
Next Steps
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 that arranges DSCR financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. Program terms change, every file is underwritten individually, and nothing here is 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.
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References
1. CFPB’s consumer guidance on prepayment penalties
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can a Trust Hold Title on a DSCR Rental Loan? · Can You Buy a Pittsburgh Rental With a DSCR Loan? · Is a DSCR Loan Worth It Over a Conventional Loan on a Rental?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.