Plan is to use  $1.6m of our own money and $800k from the bank. 

Also check with the bank that you currently have a mortgage with to see if there is a penalty for early repayment.

Will keep that in my memory banks. 

Also, work on your credit and make sure you have a great score so when you do go to the bank, it will be an easy approval!

Eventually if I do renovation would I want to do bank financing?  

The utility in MA has a great net metering program that allows you to bank your unused production without needing batteries. 

Comparing these terms to the best financing I've found through a bank ($320k loan, 5.5% fixed for 10 years then refinance, amortized over 25), with same purchase price and down payment, results in a lower monthly payment by $315/mo, plus my principal balance after 10 years of payments through bank financing would be $240,000, compared to the $180,000 balloon that the seller wants at year 10. 

most local banks will try to have you on 20 years which changes the numbers and cash-flow. 

Comparing these terms to the best financing I've found through a bank ($320k loan, 5.5% fixed for 10 years then refinance, amortized over 25), with same purchase price and down payment, results in a lower monthly payment by $315/mo, plus my principal balance after 10 years of payments through bank financing would be $240,000, compared to the $180,000 balloon that the seller wants at year 10.

This really isn't the seller's decision it is the bank's you need to have the seller talk to the bank about this or maybe even set up a conference call with the seller and the bank.