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I have a mortgage with a balloon payment due in 5 years. The rate is 5% fixed and the interest is fully deductible. I am inheriting enough money this quarter to pay off the mortgage now, but I know there must be a better way.

I'd like to invest a fixed amount today and get a fixed amount out in 5 years to pay off the mortgage. I'd like to earn around 5 to 7%, but not be taxed during the 5 years I will hold the investment. In addition, I want the gain on the investment to be taxed at long term capital gain rates when I cash out the investment in 5 years. In other words, I want the time value of money on my taxes and I want the rate spread on capital gains.

I know zero's won't work, because of the OID rules (taxed each year at ordinary rates). One more fact: I live in Washington state so there is no individual state income tax.

Any ideas?
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