A refinance pays your note off in full, and that payoff is divided between you and the partial buyer. The buyer receives what they are still owed for the payments they bought and have not yet collected, and the remainder comes to you. The formula for the split sits in your partial agreement.
What a refinance does to your note
When a borrower refinances, a new lender pays off the old debt, and your note is that old debt. One payment arrives covering the whole balance owed on the payoff date, and the note ends. A sale of the property has the same effect if your note has a due-on-sale clause, a term that makes the balance payable when the property changes hands. In both cases a partial purchase that was meant to run for years stops early, with one lump sum to share.
Who handles the money
The new lender or its closing agent asks for a payoff statement, a letter giving the exact amount needed to pay the note off on a set date. During a partial that request goes to whoever holds and services the note: the buyer, or a servicing company acting for both of you. They collect the payoff, release the lien on the property and pay each side its share.
Two documents should reach you when that happens, a copy of the payoff statement and a written breakdown of the split. If the draft agreement does not promise you both, have that added before you sign.
How the payoff is divided
Under a fair clause, the buyer is paid the value of the payments they bought but have not received, worked out at the yield they priced the deal at. Everything above that amount is yours.
Suppose a note pays $1,140 a month with about $129,400 owed. You sold the next 60 payments for $56,200, and the borrower refinances after making 24 of them.
| At the refinance | Amount |
|---|---|
| Payoff on the note | About $116,800 |
| Buyer’s share, for 36 payments not yet received | About $36,400 |
| Your share | About $80,400 |
Illustrative example. The note carries 6% interest and the buyer’s share is worked out at an 8% yield, and your agreement may use a different formula.
The 36 payments the buyer was still waiting for add up to $41,040 on the schedule. Because the buyer is being paid now and not over three years, the formula gives them about $36,400, and the difference of roughly $4,600 stays in your share.
Clauses that shift the split toward the buyer
Some agreements divide a payoff differently. Among the clauses to check in a partial purchase agreement, the early-payoff wording is where to look for any of these:
- The buyer is paid the full face amount of the payments not yet received, with no reduction for being paid early.
- A fee or a minimum return is added for the buyer if the note pays off before a certain date.
- The buyer takes a fixed percentage of any payoff, whatever they are still owed.
- The agreement is silent on early payoff.
Each of the first three takes money out of your share, and silence leaves the split to be argued once the money is already on the table.
What an early payoff does to your total
You had planned to wait five years for the note to come back and then collect for nine more. With a refinance your share arrives early, in one payment, and the risk that the borrower stops paying is gone. The cost is the interest you would have gone on earning. In the example you end up with about $136,600: $56,200 at the start and about $80,400 at the refinance. That is less than the scheduled payments would have added up to, and more than the $115,000 a full sale of the same note would have paid.
Price a payoff before it happens
A borrower’s decision to refinance is out of your hands, so the split is the part to settle on paper. When you send us your note details for a partial quote, ask to see the payoff clause along with the price, and ask for the split to be shown in dollars for a payoff at the end of year one, year two and year three. Keep that page with your agreement. To check the figures on it yourself, follow the formula as it is worked step by step in our longer guide to early payoff during a partial.
Related questions
Can I stop my borrower from refinancing during a partial?
A partial gives you no power to. Whether the borrower may pay off early depends on the terms of the note, and an attorney can tell you how your state treats them. What you can settle is how the payoff is divided, which is set in your partial agreement.
Does the buyer keep the lump sum they already paid me?
The cash you received at closing is yours. At a payoff, the buyer is paid for the payments they bought and have not yet received, and you receive the remainder under the formula in the agreement.
What if the borrower sells the property and does not refinance?
If your note has a due-on-sale clause, the balance becomes payable when the property is sold. The note is then paid off and the payoff is divided in the same way as after a refinance.