Refinancing Risk

Refinancing risk is the chance that a borrower cannot replace a maturing or resetting loan on acceptable terms. For DSCR borrowers it shows up at the end of a balloon, an interest-only period or an adjustable-rate reset, when the new payment has to pass the ratio again.

Rates are the usual cause. On the site's example, a $375,000 loan at 7.5% gives a DSCR of about 1.20. The same loan at 8.5% has a principal and interest payment near $2,883 and a DSCR near 1.11, which some lenders will not accept at the same loan amount.

The fix is usually more equity. The borrower pays down the balance to get the ratio back over the minimum, or accepts a smaller loan. Fixed-rate, fully amortizing terms remove most of the risk, at the cost of a higher payment today. Run both rates through the DSCR calculator before you commit.

Further reading: Refinancing Risk on Wikipedia.