Should you refinance a DSCR?

Question

Refinancing loans with a focus on Debt Service Coverage Ratio (DSCR) can be a strategic decision for businesses. Here are some situations when refinancing might be considered:

1. Improved DSCR: If a company’s DSCR has increased significantly since the original loan was taken out, it may qualify for better interest rates or terms, making refinancing advantageous.

2. Declining Interest Rates: When market interest rates drop, refinancing can reduce monthly payments, thus improving cash flow and enhancing the DSCR.

3. Cash Flow Needs: If a business faces cash flow constraints, refinancing to lower payments or extend the loan term can help improve DSCR by making debt obligations more manageable.

4. Debt Consolidation: If a business has multiple loans with varying terms and rates, consolidating them into a single loan with a better DSCR can simplify repayments and potentially lower overall interest costs.

5. Change in Financial Position: If the financial health of the business has improved (higher revenues or profits), it may be a good time to refinance to leverage that strength for better loan terms.

6. Prepayment Penalties: If prepayment penalties on the current loan are manageable, refinancing might still be beneficial if the new terms lead to significant long-term savings.

7. Goal of Expansion: Businesses looking to expand might refinance existing debt to access additional capital while maintaining a healthy DSCR.

8. Avoiding Default Risk: If a business is at risk of falling below the acceptable DSCR threshold, refinancing can provide relief and help prevent default.

It's important for businesses to analyze their specific financial situation and consider consulting with a financial advisor before making refinancing decisions.

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Robin Simon · Answer

Honestly seems like a little overkill on this decision - unless its strictly a rate-term refinance because rates have dropped, it usually just should come down to a side by side comparison of status quo vs. refinanced (+ how any cash-out capital is deployed)

Connor Hibbs · Answer

Thank you for this Roger. This is very well worded, and I believe covers most new investors' concerns and questions.

For Nicholas; it depends. If you have a lower rate locked in currently and have no immediate needs for additional capital, then you should wait. If you need additional liquidity for other deals or if you could get a lower rate now, then it could make sense. Something to keep in mind though is that with the DSCR it is a new mortgage which entails higher closing costs as well as paying off any existing liens. It really is going to come down to the current state of your property and if you have any needs for additional liquidity.

Nicholas Pugh · Answer

Thx for the reply, however, my asking if this is the right time to Refi was solely based on the current interest rates and what they will do on the near future. With the election over and the New year approaching ,its a waiting game for that extra 1/2 or full point to come down. Current rate for a 10 year Refi / cash out is between 6.5 - 6.75%.....coming down to 6% or under can make a huge cash flow difference over 5-10 year period.

Jacqueline Wright · Answer

Great points, Roger!

Refinancing a DSCR loan can be a smart move in the right circumstances, especially when it aligns with broader financial goals like cash flow management, interest savings, or expansion plans. The key is understanding the timing and evaluating the full picture, including costs like prepayment penalties and potential closing fees.

Your breakdown covers all the scenarios where refinancing could make sense—businesses just need to ensure the benefits outweigh the costs and risks. Thanks for sharing such a thorough guide!

Nicholas Pugh · Answer

Yes this is a Refi on a commercial property with additional large cash out included for sole purpose of reinvesting into another property, as well as a large operating line of credit in addition to the Refi is included. Prepay is only 1 year which is great if interest rates drop. My current rate is on an adjustable at 9.5% ...Ouch. So personally, this may be a good time to Refi with this 1 year Prepay and closing costs are not that high. I appreciate the feed back from everyone, as financing can get a bit tricky, not to mention complicated sometimes trying to look at all the different ways to calculate how financing can or cannot me more beneficial than your current situation.

Erik Estrada · Answer

Pretty solid points here,

I would also like to add refinancing with a non-traditional DSCR based loan can assist with getting access to cash quickly as there are many lenders that have a lower seasoning requirement.

Something to keep in mind.

Deborah Wodell · Answer

Refinancing with a focus on DSCR is a smart move when the timing and circumstances align. The key is to assess your current financial position and goals. If your DSCR has improved or market rates have dropped, refinancing might secure you better terms and improve cash flow. It’s also a great strategy for consolidating debt or accessing additional capital for growth.

However, be mindful of potential prepayment penalties and how they weigh against long-term savings. Analyzing the impact on your overall financial health is critical. If you’re considering this step, consulting with a financial expert to evaluate options tailored to your situation can be invaluable

Daniel Baccarini II · Answer

It depends upon what your current rate is, how much equity you have in the property, does your current financing have a prepay, and what your plan is for deploying any cash out. I'm working with a lot of investors who are pulling cash out of properties. The reason they're doing so is because they want to buy other stuff.

Unfortunately, there is no one size fits all approach. If you have a lot of equity or if you bought the property when your credit score wasn't great (leading to a high interest rate), then it might make sense.

Roger Mace · Answer

A DSCR refi would depend on how long you have had the loan and what the prepayment penalties might be.

To determine whether a DSCR refinance is advantageous while considering prepayment penalties, follow these steps:1. Understand Prepayment Penalties: Review the terms of your existing loan for details on the prepayment penalty. This fee is typically a percentage of the remaining balance and can vary based on the loan agreement.2. Calculate the Prepayment Penalty: Determine the exact cost of the prepayment penalty by calculating the percentage of the remaining loan balance. This amount will be a direct cost of refinancing that you'll need to factor into your overall analysis.3. Assess Current DSCR: Calculate your current DSCR using net operating income (NOI) and the total debt service from your existing loan. This will give you a baseline for comparison.4. Evaluate New Loan Terms: Look at the potential new loan terms, including interest rates, repayment schedules, and any fees associated with the new loan. Estimate the new DSCR based on these terms.5. Compare Savings: Subtract the prepayment penalty from the potential savings generated by refinancing (e.g., lower monthly payments, reduced interest rates). Ensure that the savings from the new loan outweigh the costs of the prepayment penalty and any closing costs involved in the refinance.6. Calculate New DSCR: With the new loan terms, calculate the projected DSCR. Ensure that the new DSCR is higher than 1 and ideally improves your financial position compared to your current DSCR.7. Consider the Duration: Evaluate how long you plan to keep the new loan. If you intend to stay in the property long enough to recoup the costs associated with the prepayment penalty and enjoy the benefits of the lower rates, refinancing may be worthwhile.8. Perform a Break-Even Analysis: Determine how long it will take for the savings from the refinance to cover the prepayment penalty and any other refinancing costs. If the break-even point is within your expected time frame of holding the mortgage, it may be a good move.9. Consult with Experts: If you're uncertain, seek advice from a financial advisor or mortgage professional who can help you evaluate the specifics of your situation and give tailored recommendations.By following these steps, you can make a well-informed decision about whether refinancing while considering prepayment penalties is a good financial strategy for you.

Jay Hinrichs · Answer

most DSCR loans have some pretty stiff pre pay penalties ..

Should you refinance a DSCR?

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