But which is better for you? Almost always you are better off selling with a higher sales price and a lower interest rate. Especially if this was your primary residence and your capital gain will be tax free (subject to the provisions of IRS code). But you will pay tax on the interest you receive. The lower the amount of interest, the less tax you pay. But you will end up with the same monthly payment.

Also of course, if you take back a mortgage of  $110,000 with a low interest rate, and the borrower refinances, you get $110,000 (less of course if they have been making payments). But if you take back a mortgage of $95,000 with a high interest rate, you will lose out to the tune of $15,000 if the borrower refinances and pays you off.

It is a disadvantage to the buyer. They are better off with a lower sales price and a higher interest rate. For them, the higher the interest rate the greater their tax deduction every year. Also of course, they have to pay you off less if they refinance.

However if you want to give the buyers an incentive to refinance and pay you off, sell for a lower price and a higher interest rate. If market rates are 8% per annum and you are charging them 8% per annum, why should they pay the costs involved in re-financing. But of course, as we have seen throughout 2000 to 2002, interest rates have dropped. So you could have been charging market rates then, now they can refinance for even less.

But if market rates are 8% per annum and you are charging them 10% per annum, there is obviously an incentive. Also, the bank appraisal is more likely to cover the outstanding balance. Obviously, if your home is only worth $60,000 and you sold it for $80,000, taking back a $75,000 mortgage, no bank will lend them the money to pay you off until your mortgage is paid down quite a bit and/or the house has gone up in value enough to cover your loan.