Dear Dave: Should I ever consider a 5/1 adjustable loan if I’m buying a house and plan to pay it off in five years?
Dear Anonymous: No! The reason is you can never be assured that you’re going to pay it off in five years. If you go into it with that mindset, then you’re basically saying you can predict the future will be exactly how you want it to be. That’s pretty naïve. Your future will never be what you think it will be. It’s either going to be better or worse, but your future will never turn out exactly the way you plan for it to be.
If you can’t buy a home with cash, you need the stability of a 15-year, fixed-rate mortgage in your life. We’re living in the lowest mortgage interest rate environment in about 50 years. I saw a 3.02 percent 15-year fixed-rate mortgage just the other day.
For those of you who have not refinanced, if you’re staying in your home or you’re sitting on an adjustable rate, this is a great time to change that.
Still, people are sitting around yawning like these kinds of rates are going to be around forever. It’s gone on for a while now, but don’t let that fool you into thinking those kinds of rates are normal. They’re not going to last forever.
No, I would never under any circumstances take an adjustable-rate mortgage.
Dear Dave: Do I set aside six months’ worth of paychecks or the amount of my bills for six months when it’s time to save up my fully funded emergency fund?
Dear Steve: In my plan, Baby Step 3 is when I advise people to save up three to six months of expenses in a fully loaded emergency fund. This is set aside and not touched for any reason other than a true emergency. It’s not a Bahamas fund or a new living room furniture fund. It’s an emergency fund. It’s not an investment or fun money; it’s insurance. Think of your emergency fund as a protective barrier that keeps you from going into debt or cashing out investments when life throws bad things your way.
How do you decide where to land in the three- to six-month range of expenses? That depends on how much risk your household has. If there’s only one income in the equation, you have more risk, so you should skew things toward six months. Being self-employed or a commissioned salesperson is also a situation where this would be true. If there are two incomes, and both come from steady, dependable sources, you could fall into the middle of that range or even more toward the three-month side.
Make sure your emergency fund is easily accessible too. A simple money market account with check-writing privileges works fine. You want to make sure you can get your money quickly when the need arises.
Dave’s latest project, EveryDollar, provides a free online budget tool. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.