Discount Points

Discount points let a borrower trade cash at closing for a lower rate. Each point costs one percent of what is borrowed. On a BRRRR refinance they raise closing costs, which reduces the cash that comes back, in exchange for a smaller payment that improves cash flow.

One point on the default $375,000 refinance is $3,750. Say that point cut the rate a quarter point, to 7%. The monthly payment falls around $63, so the fee pays for itself only after about 59 months. An investor who expects to refinance again or sell within five years would lose money on the trade.

Hard money loans also charge points, but those are origination fees, not rate buydowns. The default deal pays two points, or $5,400, on the $270,000 short-term loan, and that money is part of the cash the investor needs to recover at the refinance.

Further reading: Discount Points on Wikipedia.