What an owner-financed note is
In a seller-financed sale — also called owner financing, an owner carry, or a seller carryback — the seller takes the role the bank would normally play. The buyer pays a down payment at closing, signs a promissory note for the rest, and pays the seller monthly instead of a lender. Title transfers, and the seller's interest is secured by a mortgage or deed of trust recorded against the property, so a default can be foreclosed much as a bank would foreclose.
The practical difference from bank financing is that nothing here is quoted off a rate sheet. Price, down payment, interest rate, amortization and balloon are all negotiated between two people, and they trade against each other — a seller who wants a higher price will often concede on rate, and a buyer who wants a smaller down payment usually pays for it somewhere else. This calculator exists to put numbers on those trades before you agree to them.
Reading the example this page loads with
The defaults describe a conventional structure: a thin down payment, a rate above bank pricing, and a balloon well before the loan is paid off. These figures are illustrative — a teaching example, not market data for any particular city.
| Input | Value |
|---|
| Purchase price | $300,000 |
| Down payment | 10% · $30,000 |
| Interest rate | 8.0% |
| Payment type · amortization | Amortizing · 30 yrs |
| Balloon due in | 5 years |
The note is $270,000 after the down payment, and amortized over thirty years at 8% the payment is $1,981 a month. Sixty of those payments come to $118,870. Then the balloon arrives, and the buyer owes the entire remaining balance in one sum: $256,689. Across the whole arrangement the seller collects $405,558 — the $30,000 down, the $118,870 of payments, and the $256,689 payoff — of which $105,558 is interest.
Why the balance barely moves before the balloon
The number worth sitting with is that after five years and $118,870 in payments, the balance has fallen from $270,000 to $256,689. Only $13,311 of principal has been retired — under 5% of the note. Everything else went to interest.
That is not a quirk of these inputs; it is how amortization works. Early payments are mostly interest because interest is charged on a balance that has barely started shrinking, and a payment sized for a thirty-year payoff makes very slow progress in its first five. For the buyer this means the balloon is nearly the whole original note, and refinancing or selling by that date is not a contingency plan but the plan. For the seller it means the principal stays outstanding and earning for the full term — which is the attraction, and also the risk, since the money is tied up in a borrower who still owes almost everything.
Amortizing versus interest-only
Switch payment type to interest-only and the monthly payment on the same note drops to $1,800, because nothing is going to principal. The balloon then equals the full $270,000. Total collected rises to $408,000 and total interest to $108,000.
The result is worth noticing: the interest-only structure pays the seller more interest — about $2,400 more over five years — while charging the buyer less each month. There is no trick in it. Because no principal is ever retired, the entire balance earns interest for the full sixty months rather than a slowly shrinking one. Whether that trade suits either party depends on what each actually wants: a buyer optimizing monthly cash flow and a seller optimizing yield can both prefer interest-only, while a buyer who wants to build equity before a balloon cannot.
What the seller's return actually depends on
Total collected is a complete figure, but it is not a rate of return, and the two are easy to confuse. Money arriving in year five is worth less than the same money at closing, so comparing $405,558 against a $300,000 sale price overstates the gain unless you account for when each dollar arrives. The figures here are cash totals rather than an internal rate of return.
The larger determinant is whether the balloon is actually paid. A note that performs for five years and then defaults at the balloon leaves the seller holding a foreclosure rather than a payoff, and the whole yield calculation turns on an event five years out that neither party controls. That is the argument for underwriting the buyer — their income, reserves, and realistic path to a refinance — with roughly the seriousness a lender would, rather than treating the down payment as sufficient protection. For a buyer, the same logic runs in reverse: the question is not whether today's payment is affordable but whether a refinance will be available on the date the balloon falls due.
The rules this calculator does not model
Seller financing sits inside a legal framework the arithmetic knows nothing about, and one piece of it bears directly on the default example above. Where the buyer is a consumer purchasing a dwelling to live in, Regulation Z's seller-financer exclusions apply. The three-property exclusion at 12 CFR 1026.36(a)(4) — for a seller financing up to three properties in a twelve-month period — requires that the financing be fully amortizing, which a balloon note is not. The narrower one-property exclusion at 1026.36(a)(5), for a natural person, estate or trust financing a single property in twelve months, instead requires only a repayment schedule that produces no negative amortization. Both require a fixed rate, or an adjustable rate that cannot adjust for at least five years and carries reasonable caps, and both are unavailable to a seller who built the home.
In short, the five-year balloon this page loads by default may be perfectly ordinary in an investor-to-investor sale and a problem in a sale to an owner-occupant. Where the buyer is purchasing for business purposes rather than to occupy, this consumer framework generally does not apply at all — but "generally" is doing real work in that sentence, and the determination turns on the actual purpose of the credit.
Other edges this page also leaves alone: state usury ceilings, which cap the rate you may legally charge and vary widely; dealer rules that can change the tax treatment if you carry notes routinely; installment sale treatment and how interest is reported; which security instrument your state uses and what foreclosure looks like under it; and any existing mortgage's due-on-sale clause, which a sale can trigger. If the underlying loan is staying in place, the wrap and subject-to calculator models that structure instead. None of this is legal or tax advice — have a real estate attorney in the state where the property sits paper the deal before you sign anything.
Using it from either side of the table
As a buyer, the figures to test are the payment against what the property can actually produce and the balloon against your refinance path. If you are buying it as a rental, run the same deal through the single-family rental analyzer to see whether the payment survives once management, maintenance, vacancy and capital reserves are counted — a seller-financed payment is a payment like any other, and an attractive structure does not make a property cash flow. If the plan is to refinance out, the DSCR loan qualifier shows whether the rent would support the loan you would need.
As a seller, the structure is a set of levers rather than a single answer. A larger down payment reduces what is at risk and improves the odds the buyer stays current. A longer balloon gives the buyer more time to arrange a refinance and keeps your capital working longer. A higher rate raises the yield and raises the default risk with it. Model two or three combinations here before the negotiation rather than during it, because the version you can defend with numbers is the one you will hold on to.