Annual interest savings = ( bps rate reduction / 10,000) × loan balance. Compare PV of those savings over the expected hold (discounted at sponsor cost of capital) against upfront points. Break-even on a 25 bps buy-down at 1 point is typically 3-5 years; the trade wins when hold extends past break-even.
Worked ROI calculation for a 25 bps buy-down
Setup: $25M perm loan, 10-year term, 25 bps buy-down available at 1 point ($250K upfront). Sponsor's cost of capital 8%. Annual interest savings = 25 bps × $25M = $62,500.
PV math: PV of $62,500 annuity for 10 years at 8% discount rate = $419K. ROI = $419K / $250K = 1.68x. Net PV gain = $169K. The buy-down is accretive if the loan stays in place for the full term.
Break-even: $250K upfront ÷ $62,500 annual savings = 4.0 years (undiscounted). PV-adjusted break-even at 8% discount rate = ~5.0 years.
Sensitivity: if the loan is prepaid in year 3 (e.g., asset sale), the sponsor recovers $187,500 of savings (3 × $62,500) against $250K upfront, a $62,500 net loss. The buy-down is therefore a bet on hold duration. Accretive only when expected hold comfortably exceeds the break-even period.
Structural alternative: instead of paying points to buy down rate, push the savings into IO term extension. A longer IO period typically delivers more cash-on-cash return per dollar than a rate buy-down, particularly when the sponsor's cost of capital exceeds the loan rate.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Secured Overnight Financing Rate (SOFR) · Federal Reserve Bank of New York · daily