Can the Borrower Refinance My Land Note in Texas?

If you hold an owner-financed land note in Texas, the question of whether the borrower can refinance your land note in Texas is one that may cause you both curiosity and concern. On one hand, a refinance means your note gets paid off in full — you receive the entire remaining balance and your investment comes to a successful conclusion. On the other hand, you lose a performing income stream that you may have counted on for years to come, and you are suddenly faced with the challenge of reinvesting a lump sum in what may be a less favorable market. Understanding the mechanics of refinancing, your rights as a note holder, the likelihood of it happening, and how to prepare for it gives you the knowledge to navigate this situation with confidence rather than anxiety.

The reality is that borrower refinancing of owner-financed land notes in Texas is less common than many note holders expect, but it does happen, and when it does, the impact on the note holder can be significant. The borrower's ability and motivation to refinance depend on a complex interplay of factors including their credit profile, the property type, the availability of conventional lenders willing to finance rural land, the current interest rate environment, and the specific terms of your note. This comprehensive guide will examine all of these factors so you have a complete picture of what refinancing means for you as a Texas land note holder.

Whether you are actively expecting a refinance, worried about losing your income stream, or simply trying to understand all the ways your note might play out, this article will give you the practical knowledge you need. We will cover the legal framework, the practical realities, the financial implications for you as the note holder, and the strategic considerations that should inform your planning. By the end, you will understand exactly how the borrower refinancing question affects your Texas land note and what you can do about it.

The Borrower's Right to Refinance a Texas Land Note

Prepayment Rights Under Texas Law

The fundamental question of whether a borrower can refinance your land note in Texas comes down to whether the borrower has the right to prepay the note — to pay it off before the scheduled maturity date. In Texas, the answer depends entirely on the terms of the promissory note itself. If the note contains no prepayment restriction, the borrower has the right to pay off the note at any time without penalty. If the note includes a prepayment penalty or lockout provision, the borrower's right to prepay is limited by those terms. Texas law does not mandate a universal right of prepayment for all promissory notes, so the document controls.

In practice, many owner-financed Texas land notes either include no prepayment language at all (which is generally interpreted as allowing prepayment) or include a clause explicitly permitting prepayment without penalty. Fewer notes include meaningful prepayment restrictions, although they are not uncommon, particularly in notes held by more sophisticated note holders who want to protect their income stream. If your note permits prepayment without penalty — which is the most common scenario — then the borrower can refinance at any time simply by obtaining new financing and using the proceeds to pay you the full remaining balance of the note.

Prepayment Penalties and Lockout Provisions

If you had the foresight (or good legal advice) to include a prepayment penalty in your promissory note, you have some protection against early payoff through refinancing. A prepayment penalty is a fee the borrower must pay in addition to the remaining balance if they pay off the note before a specified date. Common structures include a flat percentage of the remaining balance (such as 2 to 5 percent) that decreases over time, a declining penalty that applies during the first few years and then expires, or a yield maintenance formula designed to compensate the note holder for the lost interest income. A lockout provision is even stronger — it prohibits prepayment entirely during a specified period, meaning the borrower literally cannot pay off the note before the lockout expires, regardless of the circumstances.

The enforceability of prepayment penalties in Texas depends on the specific terms and the type of transaction. For commercial transactions and most owner-financed land deals, prepayment penalties are generally enforceable as long as they are clearly stated in the note and are not unconscionable. However, there are federal regulations under the Truth in Lending Act and the Dodd-Frank Act that restrict prepayment penalties on certain types of residential mortgage loans. If your note involves a residential property as opposed to raw land, the regulatory landscape is more complex, and the enforceability of a prepayment penalty may be subject to additional limitations. Consulting with a Texas attorney who specializes in real estate finance is advisable if you have questions about the enforceability of your specific prepayment provisions.

How Likely Is a Borrower to Refinance Your Texas Land Note?

The Reality of Financing Rural Texas Land

One of the reasons owner financing exists in the Texas land market is that conventional lenders are often reluctant to finance the types of properties that dominate this market. Raw land, unimproved acreage, rural recreational tracts, and small parcels are considered non-standard collateral by most banks and mortgage companies. These lenders prefer to finance improved residential properties with clear comps, standard appraisals, and established neighborhoods — not a 10-acre tract of brush country in South Texas or a 50-acre hunting lease in the Hill Country. This means that many borrowers who purchase land through owner financing have limited refinancing options even if they want to refinance, simply because they cannot find a conventional lender willing to make the loan.

That said, some refinancing paths do exist. Local banks and credit unions in rural Texas communities sometimes offer land loans, particularly for borrowers who have a relationship with the institution. Agricultural lenders like the Farm Credit System make loans on rural land, especially if it has an agricultural use. Some national lenders have begun offering land loan products, although their terms are typically less favorable than conventional mortgage rates. And if the borrower has improved the property since purchasing it — adding a home, a well, septic, or other infrastructure — the property becomes more financeable because it represents a more complete collateral package. All of these factors mean that while refinancing is not easy for most Texas land borrowers, it is not impossible either.

Borrower Motivations to Refinance

A borrower's motivation to refinance your land note typically boils down to economics — they want to lower their interest rate, reduce their monthly payment, or both. If you originated the note at 10 or 11 percent and conventional land loan rates have dropped to 7 or 8 percent, the borrower has a strong financial incentive to refinance. The savings can be substantial over the remaining life of the note, particularly for larger balances and longer terms. Other motivations include the desire to cash out equity that has built up in the property, to consolidate the land loan with other debts, or simply to move from an owner-financed arrangement to a more conventional lending relationship. Whatever the motivation, the practical question is whether the borrower can actually qualify for and obtain alternative financing — and as discussed above, this is often more difficult than they expect.

When Refinancing Is Most Likely

Based on patterns observed in the Texas land market, refinancing of owner-financed notes is most likely to occur in several specific circumstances: when the borrower's credit has improved significantly since the original purchase, making them eligible for conventional financing they could not previously obtain; when the property has been improved with a home or other structures that make it eligible for a conventional mortgage; when interest rates have dropped significantly below the rate on the owner-financed note; when the borrower has built substantial equity and wants to access it; or when a local lender actively solicits the borrower's business. If none of these conditions apply, the probability of refinancing is relatively low, and you can expect your note to continue performing according to its original terms.

What Happens When the Borrower Refinances: The Note Holder's Experience

The Payoff Process

When a borrower refinances your Texas land note, the process typically unfolds as follows. The borrower applies for a new loan with a conventional lender. As part of the loan process, the new lender orders a title search, which reveals your deed of trust as a lien on the property. The new lender then contacts you (or your servicer) requesting a payoff statement — a document showing the exact amount required to pay off your note, including accrued interest through the expected payoff date and any applicable prepayment penalties. You prepare and deliver the payoff statement, and at closing, the new lender disburses funds to pay off your note in full. You endorse the promissory note, execute a release of lien, and your deed of trust is released from the county records. The borrower now owes the new lender instead of you, and you have your lump sum.

It is important to prepare the payoff statement accurately and promptly. The payoff amount should include the outstanding principal balance, accrued but unpaid interest through the expected payoff date, any late fees or other charges that are due, any prepayment penalty that applies, and any other amounts specified in the note or deed of trust. Including per diem interest (the daily interest charge) is standard practice so that if the closing date shifts by a few days, the correct amount can be easily calculated. If you use a professional servicer, they will typically handle payoff statements as part of their standard service.

Financial Impact on the Note Holder

Receiving a lump sum payoff is financially different from continuing to collect monthly payments, and the implications are worth understanding. On the positive side, you receive the full remaining principal balance of the note — every dollar you were owed. You also receive any accrued interest and applicable prepayment penalties. You have eliminated all future risk associated with the note — no more worry about defaults, property value changes, or collection hassles. On the less positive side, you have lost a performing income stream that was generating interest income at a rate that may be higher than what you can earn on the lump sum in today's market. The challenge of reinvesting the payoff proceeds at a comparable return is real, particularly in interest rate environments where yields on safe investments are lower than your note's rate.

Tax Implications of an Early Payoff

If you sold the underlying property on the installment method and have been deferring gain recognition over the life of the note, a full payoff through refinancing triggers recognition of the remaining deferred gain in the year of payoff. This can result in a significant tax liability, particularly if the remaining deferred gain is large and pushes you into a higher tax bracket. Planning for this tax consequence is essential — setting aside an appropriate amount from the payoff proceeds to cover the tax bill should be part of your financial planning. For a detailed discussion of tax implications related to note transactions, our article on tax implications of selling a land note in Texas covers the key concepts in detail.

Strategies for Note Holders Concerned About Borrower Refinancing

Including Prepayment Protections in New Notes

If you are creating a new owner-financed land deal, one of the best ways to protect your income stream from early refinancing is to include prepayment protections in the promissory note. A well-drafted prepayment penalty that applies during the first 3 to 5 years of the note can discourage refinancing during the period when your lost interest income would be most significant. A declining penalty structure — for example, 5 percent in year one, 4 percent in year two, 3 percent in year three, and so on — is common and generally considered reasonable. Make sure the penalty is clearly stated in the note and that the borrower acknowledges it at closing. Having a Texas real estate attorney draft or review the language ensures enforceability.

Pricing the Refinancing Risk into Your Note

Another strategy is to structure your note with the understanding that refinancing may occur and to ensure you have earned a satisfactory return even if the note is paid off early. This might mean requiring a larger down payment, which gives you more profit upfront; setting a higher interest rate, which means you accumulate more interest income in the early years; or structuring the amortization so that a greater proportion of early payments goes to interest rather than principal. If the borrower refinances in year three, a note structured to front-load the return has already delivered meaningful income, reducing the sting of the early payoff.

Considering Selling Before the Borrower Refinances

If you believe your borrower is likely to refinance — perhaps because they have mentioned it, because their credit has improved, or because interest rates have fallen — you might consider selling your note before the refinance occurs. Selling your note to a buyer like Longhorn Note Buyers converts your future payment stream into a lump sum on your terms, at a price that reflects the note's full remaining value as a performing asset. If the borrower refinances after you sell the note, the payoff goes to the new note holder, not to you — but you have already received your lump sum and can invest it as you see fit. This strategy can be particularly attractive if you want to lock in a known value rather than risking the uncertainty of when (or if) a refinance will occur.

The Bigger Picture: Refinancing in the Context of Note Holding

Refinancing as a Success Indicator

It is worth reframing the borrower refinancing question in a positive light. If a borrower refinances your land note in Texas, it means several things have gone right. The borrower has improved their financial position to the point where they qualify for conventional financing. The property has maintained or increased its value. The note performed as intended, generating income for you over the holding period. And you receive your full remaining balance in a lump sum — no discount, no uncertainty, just a clean payoff. While losing the income stream is a legitimate concern, the payoff itself is actually the best possible outcome for a note holder in terms of capital recovery. The only scenario that is financially better for you than a full payoff is continuing to collect payments with interest for the entire remaining term — but that outcome also carries the risk that the borrower might default before the term is up.

Planning for Multiple Outcomes

The smartest approach for Texas land note holders is to plan for multiple outcomes rather than assuming the note will play out in any single way. The borrower might refinance in year three, might default in year seven, or might pay faithfully for the entire 15-year term. By understanding the financial implications of each scenario and positioning yourself to benefit regardless of which one occurs, you reduce your dependence on any single outcome and maintain flexibility. This might mean diversifying your investments so the note is not your only income source, maintaining a relationship with a note buyer like Longhorn Note Buyers who can help you sell quickly if your circumstances change, and staying informed about market conditions that might affect your borrower's refinancing options.

Ready to Sell Your Note?

Whether you are concerned about a potential borrower refinance or simply want to understand the current market value of your Texas land note, Longhorn Note Buyers is ready to help. With over $46 million in Texas notes purchased since 2007, a 100 percent close rate on every deal quoted, and a BBB A+ rating, Longhorn provides the experience, transparency, and speed that Texas note holders deserve. Nick McFadin has been buying notes since 1983, and the team understands every nuance of the Texas land note market. Call (210) 828-3573 or visit longhornnotebuyers.com to get a free, no-obligation quote within 24 hours. Knowing what your note is worth today gives you the information you need to make the best financial decision — whether that is selling now, holding for more income, or preparing for a borrower refinance.

Frequently Asked Questions

Can I prevent my borrower from refinancing my Texas land note?

You cannot permanently prevent a borrower from paying off their note unless the note contains a lockout provision that prohibits prepayment during a specified period. Even a lockout provision is temporary — it delays prepayment but does not eliminate the borrower's eventual right to pay off the note. A prepayment penalty discourages refinancing by making it more expensive but does not prohibit it. If your note allows prepayment without penalty, the borrower can refinance at any time they can obtain alternative financing. The practical protection is that many Texas land borrowers have difficulty finding conventional lenders willing to finance their specific type of property.

How much notice will I get before the borrower refinances?

There is no standard notice period for a borrower refinance. Typically, you will first learn about a potential refinance when the new lender contacts you or your servicer requesting a payoff statement. This usually happens two to four weeks before the expected closing date, although it can be shorter or longer depending on the new lender's timeline. Once you receive the payoff request, the process moves relatively quickly — the new lender closes the loan, disburses funds to pay off your note, and you receive the payoff amount. If your note includes a prepayment penalty, the borrower (or their new lender) may contact you earlier to discuss or negotiate the penalty amount.

What should I do with the money if my borrower refinances?

How you reinvest a lump sum payoff depends entirely on your financial goals, risk tolerance, and time horizon. Some note holders use the proceeds to create new owner-financed deals, effectively recycling the capital into a new note at current market rates. Others invest in diversified portfolios of stocks, bonds, or real estate. Some use the funds for personal purposes like retirement, debt reduction, or major purchases. The key consideration is the reinvestment risk — if your note was earning 10 percent and you can only earn 5 percent on safe alternatives, your income will decline. A financial advisor can help you develop a reinvestment strategy that aligns with your goals and accounts for current market conditions.

Does a borrower refinance affect me differently than if I sell the note?

Yes, there are meaningful differences. When the borrower refinances, you receive the full remaining balance of the note — no discount. When you sell the note to a buyer, you receive less than the full balance because the buyer purchases at a discount to achieve their required return. However, selling gives you control over timing — you choose when to sell, rather than waiting for the borrower to refinance (which may or may not happen). Selling also eliminates the risk that the borrower defaults before they refinance. The tax implications can also differ depending on your specific situation. Both outcomes result in a lump sum of cash, but the amounts, timing, and tax treatment are different and should be evaluated based on your individual circumstances.

If I sell my note, can the new note holder prevent the borrower from refinancing?

The new note holder has the same rights regarding prepayment that you had — they are governed by the terms of the promissory note. If the note allows prepayment without penalty, the borrower retains that right regardless of who holds the note. If the note includes a prepayment penalty, the new note holder can enforce it. The assignment of the note does not change the borrower's rights or the note's terms — it simply changes who is entitled to receive the payments and enforce the provisions. This is an important principle of note law that protects both borrowers and subsequent note holders.