Sold on seller financing but the buyer wants a 40-year amortization with a 5-year balloon, and I'm not sure which number to push back on

The analysis on amortization versus rate priority is correct, and the 30-year am at a half point lower lands the buyer in nearly the same payment while trimming your balloon-time exposure. That trade is worth offering explicitly.

The assumption doing the most work in your structure is that the buyer refinances at or before balloon. A 6-year window is more realistic than 5, agreed, but the question is what happens if they cannot qualify at year 6 either. Your fallback in that scenario is foreclosure, recovery costs, and a property you are taking back at a price you already agreed was fair to the buyer. That is not necessarily bad if the equity cushion holds, but your 271k versus 261k comparison focuses on the note balance without naming the other side of that ratio: what the property will be worth at balloon, not today.

If the property is at 350k now and appreciates modestly, a 271k payoff at year 5 or 6 still leaves room. If values soften or the property has deferred maintenance by then, the cushion compresses faster than the balance difference suggests. The LTV at balloon matters more than the nominal 10k gap, and you have not mentioned what today's value gives you as a starting LTV.

On documentation and default remedies, a real estate attorney in your state should draft or review the note, deed of trust, and any default cure provisions. Do not move on this without that step.

One structure worth asking your attorney about is an interest-rate step-up at balloon if the buyer cannot refinance and requests an extension. It costs the buyer more to stay, which sharpens their incentive to exit on schedule.

What is the current appraised or market value on the property, and does the buyer have a down payment that puts you below 80 percent LTV at origination?

The analysis here is solid, and the framing around amortization versus rate as the real negotiating lever is exactly right.

The one thing I would add on the 6-year balloon: check whether your state has any restrictions on balloon terms in owner-financed residential deals before you lock that in. A few states require minimum balloon periods or specific disclosures. One sentence to a real estate attorney before you finalize the note structure is worth it.

On the installment-sale side, if you are deferring capital gains by spreading them over the life of the note, a longer amortization does work slightly in your favor from a tax angle because it spreads principal receipts further out. But a shorter balloon collapses that benefit anyway, so the two goals pull against each other. Your CPA can tell you which tradeoff fits your actual tax situation, because I cannot.

The thing a buyer sometimes cannot articulate is whether they need a lower payment or a lower debt-to-income ratio for some future qualification. Those look the same on the surface but point to different solutions. A lower rate matters more for DTI calculations. A longer amortization matters more for raw payment size. Knowing which one your buyer is actually solving for tells you which lever is worth trading.

Everything above is a starting point for your own research and your conversations with an attorney and CPA, not a substitute for either.

What did the buyer say when you asked about the 40-year am? Did they give a reason, or did they just put it in the offer?