Rate Buydowns & Interest Reserves—When They Help Your Appraisal (and When They Don’t)

Investors love two levers that make deals pencil: rate buydowns (pay points to lower the interest rate) and interest reserves (capitalized interest to cover payments during rehab/lease-up). Both can improve financing and cash flow—but they almost never raise the appraised value. Here’s how to use them smartly.

  • Appraisal ≠ Underwriting. Appraisers value property; lenders underwrite debt.

  • Rate buydowns can improve DSCR and proceeds if your lender sizes to the actual note rate—but they do not increase appraised value.

  • Interest reserves reduce carry during construction/lease-up and support closing feasibility, yet do not add to value.

  • Use buydowns when you’re near a DSCR threshold; use reserves when you have temporary negative or thin cash flow.

What They Are (and Aren’t)

Rate Buydown (permanent): You pay points at close to permanently reduce the note rate. Helps monthly payment, DSCR, prepay risk.
Temporary Buydown (e.g., 2-1): Short-term teaser; many lenders underwrite to the fully indexed/reset rate, so it may not help proceeds.
Interest Reserve: Funds set aside in the loan to cover interest (and sometimes T&I) during construction/lease-up. Helps feasibility and closing, not value.

Appraisers value NOI before debt service. Since interest is a financing cost, neither buydowns nor reserves increase NOI—so they rarely (effectively never) raise value.

When They Help (Lender Sizing / Deal Feasibility)

1) DSCR Loan Near the Line

  • Scenario: $400k purchase, market rent $2,600, taxes/ins $600.

  • At 7.50%, PITIA ≈ $2,150 → DSCR ≈ 1.21

  • Buy down to 6.75%, PITIA ≈ $1,980 → DSCR ≈ 1.31
    Result: If your lender sizes proceeds to a target DSCR (say ≥1.20–1.25), a permanent buydown can mean more loan dollars or easier approval. Appraised value still comes from comps/market rent—not the rate.

2) Bridge / Construction with Thin or Negative Carry

  • Scenario: 12-month rehab, no income for 6 months.

  • An interest reserve covers payments until rents start, avoiding out-of-pocket bleeding and reducing execution risk.
    Result: Improves closing feasibility and covenant compliance. Appraisal (As-Is / As-Completed) doesn’t change.

3) Lease-Up Plans on Value-Add

  • You expect DSCR to inflect around Month 9–12.

  • Reserve + modest buydown can bridge to that month, letting the lender size to stabilized coverage.
    Result: Smoother monthlys, better odds of take-out refi—but again, value is tied to stabilized NOI, not your interest math.

When They Don’t Help

  • Hoping to “boost appraised value.” Buydowns and reserves don’t raise value because appraisers exclude financing costs from NOI.

  • Temporary buydowns when the lender underwrites to the reset rate—no DSCR gain, just marketing.

  • Stuffing oversized reserves into sources/uses to chase a higher value—appraisers won’t give credit.

  • Using buydowns to justify hero pricing. Cap rates and comps, not your coupon, determine value.

Smart Math (Break-Even on a Permanent Buydown)

  1. Cost of points (in dollars) ÷ Monthly payment savings = Break-even months.

  2. If your expected hold period > break-even, the buydown may be worth it.

Example:

  • Loan: $350,000. Points to buy down: 1.25% → $4,375 cost.

  • Savings from lower rate: $115/mo.

  • Break-even: $4,375 ÷ $115 ≈ 38 months.
    If you’ll hold 4–7 years, that’s attractive; if you’ll sell in 18 months, skip it.

Appraisal vs. Underwriting vs. Cash Flow (Keep the Lenses Straight)

  • Appraisal: Market value from comps (1–4 units) or capitalized/stabilized NOI (5+). Ignores interest expense.

  • Underwriting: Lender’s rules (DSCR targets, reserves, max LTV/LTC). Buydowns/reserves can help here.

  • Cash Flow: Your actual monthly. Both tools can improve monthly survivability during tough periods.

Red Flags (We See and Discount)

  • Temporary buydowns pitched as a proceeds booster when we’re underwriting to the actual note/reset rate.

  • Reserves that don’t match project schedule (too small or not milestone-based).

  • No sensitivity for rate/insurance/taxes; DSCR only works at perfect settings.

When to Ask for What

  • Ask for a permanent buydown if you’re within 10–25 bps of the DSCR you need—or you plan to hold beyond the break-even months.

  • Build an interest reserve whenever the plan includes construction, vacancy, or lease-up periods that threaten DSCR.

  • Skip fancy buydowns if you’re planning an early refi/sale—save the points for capex.

How LoanFunders.com Structures These

  • DSCR & Rental: Optional permanent buydown pricing; we size to actual note rate (post I/O, if applicable).

  • Fix & Flip / GUC / Bridge: Milestone-based interest reserves sized to schedule (and T&I, when needed).

  • Take-Out Path: We model stabilized DSCR and show you whether a buydown changes proceeds or is just a payment comfort.

Next Steps (What to Send for a Soft Quote)

  • Address, rent/pro forma, taxes/ins, and target LTV/LTC

  • Scope/budget & timeline (if rehab/lease-up)

  • Your hold period (to test buydown break-even)

  • FICO band and experience snapshot

Reply to this newsletter or upload your scenario at LoanFunders.com—we’ll return DSCR/coverage math, with/without buydown, and the right-sized reserve so you can choose the most profitable path.

Disclaimer: Program terms, guidelines, and pricing are subject to change without notice and may vary by scenario. This is not a commitment to lend. All loans subject to underwriting and applicable regulations.