I carried a note on a duplex in Pflugerville last year and thought the coupon was the win

The misconception worth naming is that a higher coupon rate tightens the discount, when the note buyer's yield requirement is actually driven more by LTV and seasoning than by the face rate. At 85 percent LTV, even a well-seasoned note with a short balloon sits in riskier collateral territory, and the investor prices that before she ever looks at your 7.5 percent coupon.

Your 25 percent down estimate is close. At 75 percent LTV the collateral story changes enough that institutional note buyers typically move their required yield down by 200 to 300 basis points, and that compression is what pushes your price toward 88 or 89 cents rather than the spread between your rate and hers.

The design question for anyone structuring a note they might ever sell is whether to negotiate the down payment up front or to build a yield maintenance clause into the balloon that compensates you if you exit early, since those two levers pull the tradeable value in opposite directions from how they feel at signing. Did you have a due-on-sale clause in the note, and did the buyer's attorney flag anything about the balloon language that could affect assignability?

The assumption doing the most work in your original structure was that coupon rate and note yield are the same number. They are not, and the gap between them is exactly what the 81-cent bid was pricing.

When a note buyer underwrites a performing note, they are solving for their required yield on the money they deploy today. Your 7.5 percent coupon on a 20-year amortization with a 5-year balloon tells them the cash flow schedule. They discount that schedule back at whatever yield they need, and the difference between that present value and par is the discount. Six months of seasoning and the balloon compression helped at the margin, but the 15 percent down is the number that kept the bid where it was. At 85 percent LTV on origination, the note buyer is holding more collateral risk than they want to absorb without a wider spread. Your instinct on 25 percent down is directionally right. Lower LTV tightens the buyer's required yield because the collateral cushion is deeper, which lifts the bid price. Whether 88 or 89 cents is the right estimate depends on the buyer's current yield requirements and how they weight the 5-year balloon, but the mechanism is sound.

The risk you did not name: if the borrower hits trouble before the balloon and you need to sell into that, a note in workout or with any payment irregularity reprices dramatically. Seasoning helps, but only clean seasoning.

The structural lesson is that if liquidity is even a possibility you want to price, you are designing a secondary-market instrument at origination, and that means starting with the note buyer's yield requirement and working backward to terms, not forward from the coupon that makes the deal feel attractive to you.

What yield did the buyer tell you she needed to get to par, and did she break out how much of the discount was the LTV versus the coupon spread?