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## What if I get paid off early?

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**THE SCENARIO**
Last time, we talked about what would happen if I sold a note after owning it for a relatively short period of time. However, nothing's forcing me to sell the note. So what happens if I hold onto it, and the borrower pays it off early (through a refinance or just by coming up with a bunch of cash) rather than paying it off entirely over time?
**The question:** I bought a fully-amortizing note for $79,000 with an unpaid balance of $100,000, a payment of $898.83, and remaining term of 15 years. I collect payments for 6 years, and the borrower pays it off. What's my return?

**THE SOLUTION**
This one has several parts.
**Step 1: The borrower's rate**
N: 180 (The note has 15 x 12 = 180 months left)
I/YR: (This is what I'm trying to find)
PV: 100,000 (The borrower starts out owing $100,000)
PMT: -898.83 (The borrower's monthly payment is $898.83)
FV: 0 (The loan amortizes fully)
**Step 2: The payoff amount**
N: 72 (The borrower pays off in 6 x 12 = 72 months)
I/YR: 7.00 (The loan's interest rate is 7.00%, calculated in Step 1)
PV: 100,000 (The borrower starts out owing $100,000)
PMT: -898.83 (The borrower's monthly payment is $898.83)
FV: (This is what I'm trying to find)
**Step 3: Calculating my return**
N: 72 (I get paid off after 6 x 12 = 72 months)
I/YR: (This is what I'm trying to find)
PV: -79,000 (I paid $79,000 for the note)
PMT: 898.83 (I received $898.83 monthly payments from the borrower)
FV: 71,870.02 (The borrower pays off the loan for $71,870.02, calculated in Step 2)

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- Figure out the interest rate the borrower is paying.
- Figure out how much the borrower still owes after 6 years.
- Figure out my rate of return.

The borrower's interest rate is **7.00%**.

After 6 years, the borrower still owes **$71,870.02**, which is the payoff amount.

My return on my $79,000 investment is **12.64%**.

What do you think? Would you prefer to get paid off, or would you like to continue receiving payments? Would you be happy getting a big payoff for a higher return, or do you favor the income? Why or why not? Let us know in the comments!