Refinancing and diversified investing: ask Dave Ramsey

by Dave Ramsey

Dear Dave:

My wife and I are about to have our first child. She’d like to stay home with the baby after it’s born, so we’ll be losing about half our income. We’ve looked at our budget, and we can stay in the house but things would be very tight. I’ll make $42,000 this year, with a potential bonus of $23,000 at the end of the year. Our house payment is $1,550 a month. Do you think we should downsize to a smaller home and live more comfortably? – - – Mike

Dear Mike:

I hate it when people have to leave their homes. It can be a hurtful thing to the heart and spirit.

If you had $65,000 as a steady income the house payment wouldn’t be a big deal. But you can’t count on a potential bonus, and from your guaranteed income, more than half your take-home pay will be wrapped up in a house payment. You’d probably have to take a part-time job, or save any bonus you get to subsidize your income just to have a realistic chance of making ends meet.

I’m all for mom staying home with the kids – especially a little baby – whenever possible. But when it comes right down to it, Mike, you and your wife have to decide if it’s worth the part-time work and budget hassles to stay where you are.

Moving is no fun, especially when it’s something you’re forced to do. But you don’t want to be a slave to your house payment either! 

Dear Dave:

We’re thinking about refinancing our home, and will be talking to a loan officer next week. What kinds of things do I need to know so we can protect ourselves in the deal? – - – John

Dear John:

It’s not really a big deal. You’ll get a Truth in Lending Sheet and an Estimated Settlement Sheet. You might want a little more detail, so ask them to give you a sample settlement sheet based on the size of your loan.

Watch out for points and origination fees. These are nothing but pre-paid interest. You might get a little lower interest rate if you pay them, but the break-even point is between seven and 12 years to get your money back. Since the average mortgage is refinanced every 5.6 years, paying points and origination fees is not a good deal.

And don’t worry if the loan officer tells you this isn’t normal. They can make just as much money from the sale. They’ll just have to work a little harder to do it!

Dear Dave:

Is it a good idea not only to diversify among various mutual funds, but also among different companies that sell mutual funds? – - – Brian

Dear Brian:

There’s no need to do that. Find one good broker you’re comfortable with, and who has the heart of a teacher. You want to know what’s going on with your money, and finding someone who can explain it well and help you understand the details is a must!

Just make sure your broker is not directly connected to the mutual fund. You don’t want someone with a vested interest. What you’re looking for here is someone who can objectively connect you to a good mutual fund with a solid five- to 10-year track record.

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