How to Price a Note When You're the One Carrying the Financing

October 9, 2026 · Creative real estate finance, explained with real deals

Generated (Gemini), via Wikimedia Commons

You agreed to carry the financing on a sale. Now you're staring at a blank line where the interest rate goes, and you don't know whether 6% is generous or insane, or whether a 5-year balloon protects you or just delays a problem. Most sellers who carry paper either guess, copy a number a friend used, or split the difference between "what feels fair" and "what the buyer will accept." None of that is pricing. It's hoping.

Most likely cause

The common mistake is pricing the note like a favor instead of like a loan. Sellers think about the sale price and the monthly payment, but not about the risk they're actually taking on: an unsecured-feeling position (even though it's secured by real property), tied up for years, with a borrower who may not qualify for a bank loan in the first place. That last part matters. If your buyer could get conventional financing, they wouldn't need you. The fact that they're coming to you for seller financing is itself information about risk.

Confirm this is your situation: ask yourself if you picked the rate before you thought about the down payment size, the buyer's credit, or what happens if they stop paying in year two. If yes, you priced the relationship, not the risk.

Less common causes

A few other things trip sellers up even when they know to price for risk:

• Ignoring the term structure. A 30-year amortization with no balloon locks your money up for decades at whatever rate you picked today. Confirm this by asking: would I be comfortable holding this exact note, at this exact rate, in 2040? If the answer is no, you need a balloon or a shorter amortization, not just a different rate.
• Treating the down payment as separate from the price. A 10% down buyer and a 25% down buyer are not the same risk, even at the identical price and rate. Confirm by running the math on your loan-to-value at the point of sale. Less down payment means less cushion if you have to foreclose and resell.
• Benchmarking against the wrong market. Some sellers check mortgage rates and price a little above that. But you're not a bank with FDIC insurance and a portfolio of thousands of loans. You're one person holding one note. Confirm this by comparing your rate to what private lenders and hard money lenders charge for similar collateral, not what Fannie Mae charges.

How to fix it

Here's a method that works whether you're selling a rental house, a duplex, or your own home on terms.

• Start with a floor, not a target. Look at current private lending and hard money rates for similar property types. As a rough range, those run higher than conventional mortgage rates, often by several points, because the lender is taking on more risk and less liquidity. Your note should not price below what a stranger with money would charge for the same risk, unless you have a specific reason (family, a faster closing, avoiding a commission) to accept less.
• Price the down payment and the rate together. A larger down payment justifies a lower rate, because your downside is smaller if you have to take the property back. A thin down payment should come with a higher rate or a shorter balloon, because you're carrying more of the risk a bank would normally price in with mortgage insurance or a higher rate itself.
• Decide your term based on your own need for the money, not the buyer's comfort. If you need the cash in 5 years for another purchase or retirement, don't carry a 30-year note with no balloon. Structure it as a 30-year amortization with a 5 or 7-year balloon. The buyer gets low payments now; you get your principal back on a schedule you control.
• Underwrite the buyer like a lender would, even informally. Ask for proof of income, check if they have other debts, and ask directly why they're not using a conventional loan. If the answer is "low credit score" or "self-employed, can't show income," that's real risk you need to price into the rate, not ignore because the conversation feels awkward.
• Build in consequences for late payment. A late fee that actually stings (not $25, more like a percentage of the payment) and a clear default and acceleration clause in the note protect your return as much as the interest rate does. A note with a soft default clause is a lower-quality asset than one with teeth, even at the same rate.
• Get the note and mortgage or deed of trust drafted by someone who does this regularly. This is not the place to use a generic template pulled from the internet. An attorney or a title company that handles seller-financed deals will make sure the document is enforceable in your state and that you're actually secured by the property, not just holding a handshake.

If you want a sanity check on the number, add up three things: a base rate close to what private lenders charge, a premium for low down payment or weak credit, and a small discount if the term is short and the balloon gives you an exit. That'll land you somewhere defensible instead of somewhere arbitrary.

When it is not worth fixing

Sometimes the honest answer is that carrying the note isn't the right move at all, no matter how you price it. If you need the full sale proceeds soon, for a 1031 exchange, a new purchase, or just because you don't want your money tied up, carrying paper is the wrong tool even at a great rate. Pricing can't fix a liquidity need.

If the buyer's risk profile is bad enough that no rate feels fair, that's also a sign. A rate high enough to compensate for a buyer who can't make a 10% down payment and has unstable income starts to look like a rate they can't actually pay, which defeats the purpose. In that case, the fix isn't a higher number, it's a different buyer or a larger down payment requirement before you'll carry anything.

And if you're not willing to actually foreclose if things go wrong, carrying paper at any price is risky. The rate only protects you if you're prepared to enforce the terms. If that's not realistic for you, selling conventionally and taking the cash, even at a lower net price, may be the better trade. We write about deals like this regularly at Paper & Property, and the pattern holds: a note priced for risk and managed with real terms beats a note priced out of hope, every time.