In most cases, yes. A higher interest rate means larger payments on the same balance, so a buyer can pay closer to the balance and still earn the return they need. The exceptions are a rate the payer struggles to afford and a rate above what the law allows.
Why the rate matters to the price
A buyer prices the payments on your note, and the balance is only where those payments came from. They decide what yield they need, which is the annual return on the money they put in, and then work out what they can pay today for the payments to deliver it.
The interest rate sets the size of those payments. Of two notes with the same balance and term, the one written at the higher rate pays more each month, so a buyer will give more for it.
The discount, which is the gap between the balance owed and the price paid, comes from the distance between the rate on your note and the yield the buyer wants. The further your rate sits below that yield, the larger the discount.
The example note
The note used as a running example on this site was written at 6%. It pays $1,140 a month, with 168 payments left and about $129,400 still owed. A buyer who needs an 8% yield prices it at $115,000, a discount of $14,400 or 11.1% of the balance. That $14,400 exists because 6% is below 8%.
Illustrative example. The 8% yield is assumed for the arithmetic, and a real buyer would set theirs after looking at the payer, the equity and the lien position.
How the rate and the yield compare
| Your note’s rate is | What happens to the price |
|---|---|
| Well below the buyer’s yield | A large discount. The payments are small for the balance. |
| A little below the buyer’s yield | A smaller discount. |
| Equal to the buyer’s yield | The math returns the balance itself. In practice costs and risk still pull the offer below it. |
| Above the buyer’s yield | The math gives a figure above the balance, but a buyer has a reason to stop at the balance. |
The reason is early payoff. A payer on a high-rate note has an incentive to refinance at a lower rate when they can. A buyer who had paid more than the balance would then receive only the balance and lose the difference, so the balance acts as a ceiling on the offer.
When a high rate works against you
A rate that pushes the payment to the edge of the payer’s budget raises the risk of default, and a buyer may answer with a higher yield that takes back some of what the rate added. The refinance incentive matters here too, because an early payoff ends the buyer’s income sooner than planned.
There is also a legal side. States limit interest in some situations, and the rules differ by state and by type of loan. A note written above a limit that applies to it can be difficult to sell at all. If you have any doubt about your rate, ask an attorney before you offer the note.
The rate is set when the note is signed
Changing it afterwards takes a written modification the payer agrees to, and a payer has little reason to agree to pay more. The moment to think about the rate is before a seller-financed sale closes. A note written near the return note buyers are asking for at the time will sell much closer to its balance than one written low to help the property sale along.
Rates outside your note
A buyer’s yield moves with the wider economy. When interest rates rise, buyers can earn more elsewhere and ask more from notes, so the same note prices lower, and when rates fall the reverse happens. Because of how rising interest rates affect note values, a yield you were quoted a year ago is a poor guide to today’s. For a current one, ask us to price your note.
If your rate is low
Find the rate on the face of your note and compare it with the yield on the note shown in any offer you receive. The wider the distance, the more of the discount comes from the rate alone and the less from anything about your payer or property. A low-rate note can still be worth selling, and one way to limit the cost is to sell fewer payments at the discount through a partial, if the note is large enough for one.
A low rate is also only part of the price. Equity, the payment record and lien position feed the same yield, and they are the other factors in what your note is worth, so a note written cheaply can still price respectably when the rest of the file is strong. For cases this page leaves out, there is a longer one on how the interest rate affects your note’s value.
Related questions
Will a buyer ever pay more than the balance for a high-rate note?
A buyer has a strong reason not to. If the payer pays the note off early, the buyer receives only the balance, so anything paid above it is at risk. That makes the balance the practical upper limit.
My note has a low interest rate. Is it still worth selling?
It can be, but expect a larger discount. A partial sale is worth comparing if your note is large enough for one, because you sell fewer payments at that discount and keep the rest. If you do not need the cash, keeping the note may be the better choice.
Does an adjustable rate change how my note is priced?
Yes. A buyer cannot be sure what future payments will be, so they look at how the rate adjusts, what index it follows and any caps written into the note. Send the full note so the buyer can read the adjustment terms.