Discount Rate
The rate of return used to convert a note's future payments into today's value — higher rates mean lower prices.
The discount rate is the rate of return used to convert future payments into their present value — the interest rate plugged into the pricing formula that turns your note's payment stream into a dollar price today. In note buying, the discount rate is the buyer's required yield: the annual return they need to compensate for time and risk. It is the most powerful single input in any note offer, because small changes in the discount rate produce meaningful changes in price.
How the discount rate works
To value your note, a buyer discounts each future payment back to today at the discount rate. The relationship is inverse:
- Higher discount rate → lower price. More return required means future payments are worth less today.
- Lower discount rate → higher price. Less return required means future payments are worth more today.
In the note PV formula PV = pmt × (1 − (1+i)^−n) ÷ i + balloon ÷ (1+i)^n, the discount rate is i (here a monthly rate, equal to the annual rate ÷ 12). Raise i and PV falls; lower it and PV rises.
What determines the discount rate on your note
The buyer sets the discount rate based on the note's risk and competition for capital. Factors that push it up (lowering your price):
- Thin seasoning or spotty payment history
- High LTV/ITV, junior lien position
- A non-performing or sub-performing loan
- A slow, costly (judicial) foreclosure state
- A below-market note rate or very long remaining term
Factors that pull it down (raising your price) are the mirror image: strong seasoning, low LTV, first-lien position, a fair-to-high note rate, a fast-foreclosure state, and clean documentation.
A sense of scale
For performing residential owner-financed notes, discount rates (yields) commonly fall in the roughly 8%–12% range, with riskier paper higher. Our note value calculator deliberately shows an estimated offer range across about 9%–12% so you can see how the price moves as the discount rate changes — the same lever a buyer pulls.
Discount rate vs. note rate vs. discount
Three similar-sounding terms, kept distinct:
- Note rate: what the borrower pays on the balance.
- Discount rate (yield): the return the buyer requires, used to value the note.
- Discount (the dollar gap): how far below face value the price lands — the result of applying the discount rate.
What it means when you sell
You cannot dictate the discount rate, but you can lower the risk that sets it. Every improvement — provable seasoning, a strong borrower, low LTV, first-lien position, clean paperwork — reduces the rate a buyer needs and moves your price upward. Understanding the discount rate is understanding the lever behind your offer.