Q: I am in desperate need of some financial advice. I am a 75-year old widow and have just bought a home with a 30-year mortgage at 4 percent interest.
I felt I had to do this because of a family situation. I am still working part-time and my 401(k) has $29,000 in it. I have a very nice double wide mobile home which I am trying to sell for about $25,000. I also have a savings account with $20,000 in it.
I put $24,000 down on my new home. My payment is approximately $600 a month with taxes. My son wants me to try to pay this up early, by making an extra principal payment each month. I am a bit over whelmed by this because I don’t think I can ever get the loan paid off (though I would like to).
Should I prepay my loan at my age? Does this make sense at all or should I just try to keep saving and keep my cash for emergencies?
A: It’s remarkable that you’re still working part-time at age 75, but many seniors your age are continuing to make a positive contribution to society and bring in extra income at the same time.
It may not pay to follow your son’s advice. Instead, you might be better off doing as your gut tells you and continue to save your cash just in case you need it.
It’s possible that your son sees the $20,000 in the bank earning almost no interest while you are paying four percent on the loan on your home. If you are lucky and earn half a percent on your $20,000 in the bank, you’re earning about $100 on that money. At the same time, you’re paying about $600 of interest on that money to your lender.
However, your peace of mind is important and knowing that you have cash on hand to do things is important as well. Finally, if you pay down your loan over the next five or even ten years, your monthly payments will not go down. The real benefit of prepaying a 30-year loan comes to bear fruit at the end of the loan.
Your last payment to this lender would be a couple or several years before the end of the thirty years. But you probably won’t see the payoff date unless you are able to live for another twenty years or so.
I’m more concerned about the double wide mobile home that’s on the market. I’d like to see you sell that, or at least put someone in to rent it to help defray any expenses you have with the property. Or, consider dropping the price to make it more attractive to another buyer.
It sounds to me as though you’ve made some smart financial decisions even with your limited resources. Keep up the good work.