There is a saying that ER doctors get paid to make decisions. Our choices can have grave consequences, yet we often work with incomplete or erroneous information. We don’t have the luxury of time – searching for answers or waiting until we have perfect information could cost a patient their life or limb. Sometimes, there are no perfect choices. I call this the “Do you want to get kicked in the nuts or poked in the eyes?” dilemma. When there are no great options, we make the best decision we can at the time and then deal with the repercussions.
In the world of personal finance, there are no life-or-death choices, and we always have time to decide. In fact, if someone presses you to make a quick investment decision, it may be a sign of fraud. Yet there are similarities. No matter our experience and diligence, the future is unknown, we work with incomplete information and faulty assumptions, and our financial decisions carry significant weight and often come with unforeseen consequences. And sometimes, there are simply no great choices.
I have made many good decisions in my life, leading to my financial independence. Some of them were on purpose, while others were inadvertent. I’ve also made plenty of bad decisions, as outlined in 15 Money Mistakes That Have Cost Me Millions. These mistakes were due to various factors, including inexperience, market conditions, hubris, greed, fraud, bad luck, and lots of ignorance. However, I never purposefully made a poor financial decision. Until now.
The Problem
My wife and I purchased a new home in August of this year, trading a 2.99% interest rate mortgage for one at 6.6%. It was clearly a poor financial decision, yet it was one that many people are facing right now.
The US experienced historically low interest rates from 2012 – 2021, leaving many American homeowners with rates below 4%. However, rates began to climb in 2022, reaching their peak of an average of 7% in 2023. While still not high by historical standards, this jump in rates and a surge in home prices left many homeowners trapped in place. For many, to move now means a significant jump in interest rates and, thus, an untenable increase in monthly payments.
For most of the past three years, homeowners have responded by staying put. But life has a way of marching on, seemingly oblivious to the macroeconomic environment – couples get married, babies are born, jobs are lost and gained, and people eventually need or want to move.
The Background
In 2013, we bought an 1800 sqft house on nearly an acre lot 5 miles from downtown Austin. Our next-door neighbors had goats, chickens, and a pig. Llamas and horses were just down the street, and peacocks often hung out on our back porch. The house was built in 1955 and needed a lot of work. In 2016, we took the house down to the studs and rebuilt a 2500 sqft home to our specifications and style. We had our relatively modest dream house in a quiet neighborhood close to downtown, and our kids grew up with a great backyard in which to run, play, and explore.
Unfortunately, Austin has grown like a bodybuilder on steroids for the past decade, and our sleepy neighborhood was swallowed up in the process. Fast forward 11 years – traffic is terrible, the animals are gone, condos are going up down the block, and our bucolic backyard is all that remains as a bastion of peace in the chaos of urban sprawl.
Our family has also grown and changed as two kids turned into three. They initially attended the preschool down the street; we could walk them there in the morning and home in the afternoon. Elementary school was also just a short drive away. But, as the area around us grew, traffic exploded, and going anywhere outside our neighborhood became increasingly stressful and time-consuming.
This year, we decided to send our oldest child to a new school for 6th grade, where he can continue through high school. Our other two will follow him next year. This school was much farther away and would have required a minimum of an hour a day in the car. At the same time, my wife decided that after 11 years, we no longer needed an au pair to help with our children. So, we wanted a new home closer to our new school.
From a purely financial perspective, the move makes no sense. Based on the price alone, it was a lateral move – we will sell our home for almost exactly what we paid for our new home. However, the price doesn’t tell the whole financial story.
Financing
We purchased our home in 2013 for around $400,000 and put an equal amount into it during the remodel. I paid for everything in cash but then took out a mortgage on the property to free up some money to continue investing in real estate. When interest rates dropped during the pandemic, I refinanced the home at 2.99%.
Since then, interest rates have risen sharply, and the mortgage rate on our new home is 6.6%. Even with an identical mortgage amount, my payments have increased dramatically. A 30-year fixed mortgage for $500,000 at 2.99% comes with a monthly payment of $2,105, while the same amount at 6.6% is $3,193.
Additionally, the mortgage length reset at 30 years, meaning more of the monthly payment will go toward interest. In 2025, payments at the old house would have totaled $25,260, with $11,960 going toward the principal, while at the new one, it will be $38,316 and only $5,667. So, I’m paying $13,056 more while losing $6,293 in principal payments, for a total difference of $19,349 annually!
A higher mortgage interest payment may help you itemize your taxes, but don’t let the tax tail wag the dog. Write-offs are not always what they seem.
Taxes
Our property taxes have been artificially low since we purchased our home eleven years ago and completed a major remodel. Property taxes are usually high in Texas since there is no state income tax. Fortunately, the city of Austin caps the amount they will raise taxes on a property with a homestead exemption, and the house’s assessed value never caught up with its actual value after the remodel. Once we move, the house’s purchase price will be recorded, and the city can adjust its tax rate to market, which means the new owners will pay significantly more.
Unfortunately, the same is true with our new home. Now that the sale has been recorded at a new (higher) price, the city will adjust its taxes accordingly. The net result is that we will pay about double the amount in property taxes per year at the new house.
One way you may be able to pay less property tax is to purchase an off-market property for your homestead. If the house you are buying has been owned under a homestead exemption for many years or has been improved, it may carry a below-market tax rate. The city often overlooks off-market transactions and they don’t get raised to market.
Transaction costs
It costs money to buy and sell real estate. As a seller, you can expect to pay 8-10% of the sales price in transaction costs. Additionally, preparing your home for sale costs money. 11 years of dirty little fingers on white walls meant we had to paint our entire interior. Other costs included landscaping and staging.
On the buyer’s side, there are some transaction fees, and it takes money to move. There also always seem to be new items to buy for any new home, even if the new home is the same size.
Insurance
Insurance costs have skyrocketed across the country. With a new home came a new policy. Both houses are the same size, have metal roofs, and are in roughly the same geographic area. Despite our insurance agent shopping around, for some reason, our new home’s policy is nearly twice the price of our old one!
Be prepared for a jump in insurance costs if you make a move. Continue to shop around after the purchase and then annually after that. My wife was already able to find a (somewhat) cheaper policy, and we are in the process of switching. Insurance companies are not loyal to you and will raise prices whenever they can. You don’t owe them loyalty either, so shop around every year for new policies.
Why Make The “Bad” Decision to Move?
After adding all the costs, our “lateral move” was still very expensive and will increase our monthly expenditures for years to come. However, finances are not the only factor in these types of decisions.
Location
The phrase “location, location, location” describes the three most important factors in real estate value. This axiom traditionally refers to the monetary value of real estate, but I believe it also represents the value you receive from your home. The biggest value proposition of our new home is that it is close to my son’s new school. The benefits of having a 7-minute commute will compound over the next decade until my kids finish high school.
Our new home is also in a gated community with many young families. As Austin grew, so did its homeless population, and our neighborhood began to feel less safe over the years. Living a little farther out and in a small, private community lets me feel like my family is safe when I work out of town. Another drawback of our old neighborhood was its lack of families with children. Since moving, our kids have made friends, and we now have kids randomly knocking on our door to see if they want to play.
Kids grow, as do their friends and after-school activities. Over the past few years, my wife and I spent an inordinate amount of time driving our kids to their activities. I spend enough time in a car commuting twice a month to work, so being a chauffeur isn’t my favorite parental duty. This move allowed us to be closer to school and to consolidate many extracurricular activities in our area. We will spend much less time driving.
A final benefit to the new home’s location is that my bimonthly commute to West Texas decreased by about 30 minutes each way. As mentioned, I’ll take two hours less in the car if I can get it.
As you weigh whether or not to move, you may decide that a location that better serves your family where you are now and in the future is worth the additional cost.
Floorplan & Amenities
My kids don’t spend as much time outside as they did when they were younger. Our once beloved backyard, which held so many memories of children running, playing, and laughing, was eerily quiet the last few years. Their preferred activities changed, and exploring the yard lost its appeal. They now prefer swimming, reading books, riding bikes, and playing basketball. Our vacation home has a pool, and getting them out of it during the summer is hard. We previously felt that a pool in Austin wasn’t worth the risk when our children were toddlers, but it is now. So, while our new home has a smaller backyard, it does have a pool in which our kids have spent a lot of time over the past few months.
Our old home was built in the 1950s, and while we remodeled it, we tried to keep much of the original layout and charm. Unfortunately, older homes were less open than modern ones. As our family grew, we felt we needed a larger kitchen and an open living plan to ensure we spend time together.
A new home without an au pair allowed me to have my own room for an office, which was previously inside our bedroom. This room has quickly morphed into a home gym with a small desk in the corner, but I’m pleased with the outcome.
As your family grows, you may find yourself needing more or different space. What is ideal for your children as toddlers may not be the same as when they are adolescents.
What can you do if you’re in a similar situation?
What can you do to minimize the financial strain if you have these or other non-economic motivations for moving but are trapped by a low mortgage rate? The obvious answer is to wait and only move when interest rates come down. While the days of 3% mortgages are likely gone forever, rates did drop in 2024 and are expected to continue the decline in 2025. You may decide to pull the trigger when rates hit the mid-5s. However, keep in mind that home prices tend to rise as mortgage rates fall, which may work against you.
You could choose to buy a less expensive house. This likely means you will have to purchase a smaller home, one in a cheaper area, or a fixer-upper. Any of these can be good options, depending on your priorities. While it wasn’t necessary, my family would have been happy moving to a smaller home as long as it was closer to the school. If you need to move and can’t wait, you can purchase a new home now and refinance when (if) rates drop.
Another option is to buy a less expensive fixer-upper in your desired neighborhood and postpone the upgrades until you can pay for them in cash. You won’t finance as much money at the higher rates, and you can spread the cost of the remodel over time. This is essentially what we did when we purchased our last house in 2013 but didn’t remodel it until 2016.
Finally, there are other possibilities, such as buying a newly built home from a builder. Some builders are buying down the interest rates for their clients in an effort to boost sales.
Whatever you decide, just remember that optimizing your finances does not have to drive every decision. If you have laid a solid foundation, as outlined in The Financial Vitals Checklist, you can occasionally make a bad decision for good reasons. Personal finance is supposed to improve your life, not control it. Not every decision has to be perfect as long as you can deal with the repercussions.
Conclusion
While I don’t love the higher mortgage, taxes, and insurance payments, I am happy we moved. The new house, especially the new location, is more appropriate for our family at this stage. I am still unsure how I will proceed once our old home sells. Fortunately, being financially independent leaves me with options.
I may choose to pay off the new mortgage. Cash currently earns around 4.5%, but interest is taxed as ordinary income, so the effective return is 2.75% of simple interest. I have yet to find a better use for my cash this year, and paying off the loan would give me an immediate 6.6% return. While there are some downsides to paying off the mortgage, like losing the flexibility of cash and no longer being able to itemize my taxes, it might be worth it.
Then again, I may just hold on to the cash in a money market account, see how low rates drop in 2025, and refinance if advantageous.
For now, we are enjoying our new home while preparing our old one for sale. My wife is happy, my son is thriving at his new school, and all my kids are enjoying their new neighbors. So, while this was inarguably a poor financial decision, it wasn’t a poor life decision. And isn’t that what personal finance is really all about?
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