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Investing To Pay Off Quickly
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THE SCENARIO
Over the
last three posts, I've covered the concept of paying additional principal amounting to a 13th mortgage payment per year in order to pay off the loan more quickly.
This time I'm going to try and figure out a different way to get to that goal, and to do it even faster.
I'm going to use the same loan as
last time, a 30-year fully-amortizing loan for $175,000 at 11.25% interest. As we discovered, after 15 years of paying this loan I'll still owe nearly $150,000. And as we calculated
two posts ago, the difference between my normal payment and my enhanced payment is $141.64 per month.
The question: Let's say I invested my extra $141.64 every month into another investment. If I want that investment to grow for 15 years and then be large enough to pay off the remaining mortgage, what rate of return would I need to get on that other investment? For the purposes of this question, assume that I won't have to pay any taxes on the investment returns.
THE SOLUTION
This one is pretty straightforward.
First things first, make sure the calculator is using 12 Payments per Year.
N: 180 (I'm trying to pay off my mortgage in 15 years, which is 15 x 12 = 180 months)
I/YR: (This is what I'm trying to find)
PV: 0 (When I start investing, I don't have any money)
PMT: -141,64 (I'm investing $141.64 per month)
FV: 147,498.73 (I need to pay off my $147,498.73 balance at the end of the 15 years)
To meet this goal, I'd need to earn a 19.34% return on my investment.
What do you think? Making 19.34% consistently isn't easy to do, or everyone would be doing it. Do you think it's even possible? If so, how would you go about it? If not, why not? Let us know in the comments!
