The single biggest factor in what a buyer will pay for your note.
Interest rates and note values have an inverse relationship that every note holder needs to understand before entering the market. When prevailing market interest rates rise, the value of existing notes with lower rates decreases. When market rates fall, existing notes with higher rates become more valuable. This is the fundamental principle that drives note pricing, and it affects every seller's bottom line.
Here's why it works this way: a note buyer is essentially purchasing a stream of future payments. They need that investment to deliver a return that's competitive with other options available in the market. If a buyer can purchase a newly originated note at 8% interest, they have no incentive to pay full price for your existing note at 5%. They'll discount your note to bring their effective yield in line with current market rates. The bigger the gap between your note's rate and prevailing rates, the steeper the discount.
The current interest rate environment creates specific dynamics for note sellers. With mortgage rates hovering in the high 6% to low 7% range, notes originated during the 2020-2022 low-rate period — when rates were between 2.5% and 4% — will sell at significant discounts. A note with a 3% interest rate might sell for 75 to 85 cents on the dollar, depending on other factors like remaining term, payment history, and property value.
Conversely, if you hold a note with an above-market interest rate — say 8% or higher from a seller-financed deal — you're in a strong negotiating position. Buyers are eager to acquire higher-yielding notes because they deliver better returns than what's currently available. These notes often sell at 90 to 98 cents on the dollar, sometimes even at par value.
Professional note buyers think in terms of yield spread — the difference between the note's coupon rate and their target yield. Most institutional buyers target yields between 8% and 12%, depending on the risk profile of the note. If your note carries a 6% rate and the buyer needs a 10% yield, they'll calculate a purchase price that converts your 6% payment stream into an effective 10% return for them. This mathematical relationship is why every percentage point matters.
The remaining term also interacts with interest rates in important ways. A note with 25 years remaining at a below-market rate will be discounted more heavily than one with only 5 years left, because the buyer is locked into the lower yield for a much longer period. This is why sellers with long-term, low-rate notes sometimes benefit from a partial sale — selling just the next 5 or 10 years of payments at a smaller discount while retaining the later payments.
While you can't control interest rates, understanding the cycle can help you time your sale strategically. If rates are trending downward, waiting could increase your note's value. If rates are climbing, selling sooner rather than later may preserve more value. Watch the Federal Reserve's communications and mortgage rate trends for signals about where rates are heading.
That said, don't let rate-watching paralyze you. The difference between selling at a 12% discount versus a 14% discount is meaningful but modest compared to the opportunity cost of holding an asset you'd rather liquidate. If you need the capital now, the best time to sell is now. If you have flexibility, a rate-aware approach can add a few percentage points to your sale price.
The smartest first step is getting a current valuation from a reputable buyer who can show you exactly how rates are affecting your specific note's value. With that number in hand, you can make an informed decision about timing. Contact us for a free, no-obligation quote that reflects current market conditions.