Should I give up my low 2.3% mortgage rate to buy my dream $650k home?

It’s a common dilemma faced by many homeowners who got into a mortgage at the right time. Undoubtedly, a locked-in 2.3% mortgage rate seems unheard of these days, and it’s not one that a mortgage holder should be quick to give up on. But with a home value in the $300,000 range, it’s clear that our Reddit user, who recently took to the r/MiddleClassFinance subreddit, is looking for a major upgrade. Indeed, sticking with a “starter” home, even with a favorable mortgage rate, may be the best for one’s wallet, but it’s at the cost of one’s lifestyle.

If there are children on the way and more space is needed, sometimes the better move is the one that’s not financially optimal. Either way, our Reddit user faces a tough choice and should think carefully before making the move. Oftentimes, upgrading to a larger, more luxurious home can be a “trap” of sorts that sets one back on their retirement savings.

But in the case of our Reddit user, who’s considering moving from a $300k home to one that’s worth closer to $650k (still a relatively modest amount), I’d argue that there’s a pretty robust argument for moving, even though it not be easy to move on from a 2.3% mortgage rate. Let’s go through a few scenarios that someone in a similar situation should run through before making a decision. And, of course, getting the thumbs up from a financial advisor is always a prudent idea.

The case for giving up the low rate for the pricier “dream” home

For those who prioritize lifestyle and more space, going for the $650,000 dream home may be the most reasonable option, especially if it’s in the budget. And while it’s best not to let emotions dictate major financial decisions, I’d argue that if the given home is within reach and it’ll lead to less regret later on, especially if the home price continues marching higher, then it’s worth leaving the old place and mortgage rate behind.

That said, the new mortgage rate is going to be magnitudes higher than the current one. And that could make things rather tight regarding the monthly budget. Even if everything fits in the budget, our Reddit user could be set back by some number of years on the financial front.

That could mean retiring a decade or more later than expected, especially if our Reddit user is moving due to wants rather than needs. It’s not just the heftier mortgage that will weigh on the monthly budget. The cost of moving, higher property taxes, realtor fees, higher maintenance bills, and all sorts must be factored in before one follows their “dream” at the cost of letting their finances take a turn for the worse.

Keeping the old place, renting it out, and moving to that “dream” home

For those with enough financial flexibility to keep the old place (and mortgage) while pursuing the new one, renting out one’s old place could make a lot of sense, especially in a market where there’s more demand to rent rather than own. Of course, being a landlord comes with a lot of responsibility and could make for a less-than-ideal lifestyle.

I have no idea if our Reddit user has the capacity to maintain two mortgages, but if there’s more than enough room in the budget, it could allow one to maintain the “dream” mortgage rate on the old home while also moving into one’s new “dream” home.

The case for staying put (for now)

Staying put seems like the best option, especially given the financial shock that getting a larger, higher-interest mortgage could have on one’s budget. In some instances, it may make sense to prioritize lifestyle, but if one’s needs are being met and they can stick it out until the place is fully paid off, staying put may be the best move, especially since one will have more at the end of each paycheck to invest in the stock market.

Indeed, the S&P 500 looks to have a good chance of outdoing appreciation from the real estate market over time, especially when you factor in all the phantom costs. Unless our Reddit user is keen on the new place, I’d err on the side of caution and stay put, especially given the recession and inflation risks.

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