The 3% mortgage that’s costing you more than you think

Back in 2021, 3% mortgages were practically spilling out of banks.

Fast-forward to now. You’ve outgrown your space. The kids need separate rooms. That converted office/closet isn’t cutting it anymore. You need more house. But every time you think about selling, that 3% mortgage rate whispers, “Don’t let me go.”

This is where a lot of people get stuck. On one side, your life needs to grow. On the other, that low mortgage feels too good to give up. It’s “golden handcuffs” in the real estate world.

Now let’s talk about how to break the deadlock without doing something you’ll regret later.

Where the DIY rental math breaks down

Here’s the actual problem. You’re holding a loan that feels unbeatable. Meanwhile, you’re staring down a much steeper rate for a larger home. The jump from 3% to 7% on a $500,000 mortgage is more than $1,100/month (You can see how different rates impact payments using a mortgage calculator). That’s real money you notice.

So the compromise you start telling yourself is: "I’ll just rent out the current place. No need to sell. Best of both worlds." Feels reasonable. The rate lives on, and rental income covers the cost.

But this decision isn’t that simple. It’s not just about what the rent is and what the mortgage is. It’s about what you’re taking on without realizing it.

And that’s exactly where things go sideways for most people.

The two numbers most people compare are rent minus mortgage. That’s it. But here’s what doesn’t get included:

• 5–10% of annual rent lost to vacancy

• Another 5–10% of rent going toward repairs and maintenance

• Property management fees (often 8%–12%)

  • Or the hassle of doing it yourself, if you opt to skip the property manager expense

• Homeowner’s insurance that's more expensive than your current policy

• Taxes on rental income - yes, even after using the depreciation

• Loss of capital gains tax exclusion when you stop using it as your primary residence

Factor all that in, and suddenly your “positive” cash flow deflates. In some cases, it turns negative. Add the mental cost of being responsible for two properties, and the deal starts to look different.

For some people, being a landlord works just fine. But too many step into the role by accident. And the cost of that mistake is rarely minor.

Here’s an analysis I did for a client earlier this year (Key Inputs):

- 15 year investment time horizon

- 3.25% mortgage and $242k of equity in the home

- $2,300 monthly rental income

- 7% return on investment (scenario 1)

- 3% annual house appreciation and 3% annual rental growth (scenario 2)

- $3k annual hassle factor of being a landlord (it requires work)

The tax benefit most people forget

Let’s zero in on one line item that is often the most fatal misstep in doing the analysis.

When you sell a home that’s been your primary residence for at least two of the last five years, you can exclude up to $250,000 (if single) or $500,000 (if married filing jointly) in capital gains. That’s a powerful tax break.

But if you hold onto the home and rent it for too long, that exclusion becomes much harder, or impossible, to claim later. Meanwhile, when you finally sell years down the road, not only is that gain fully taxable, but you’ll also owe taxes on depreciation recapture. Using the depreciation benefit is a must when it comes to real estate rentals, but it’s not like the bill never comes due.

This isn’t a reason to rush. But it’s definitely a reason to pause and reassess what waiting might cost you.

Your Next Steps

Here’s what to walk through if you’re between renting or selling:

1. Calculate rental income the right way

   Look at local comparable rents. Then subtract your full Principal, Interest, Taxes, and Insurance, 5–10% vacancy, 5–10% maintenance, and management if you won’t do it yourself. Net operating income (NOI) is what matters, not the gross rent.

2. Get a net proceeds estimate if you sell

   Price the home based on truly recent sales. Subtract selling costs (~6%) and any remaining loan balance. If gains apply, apply the capital gains exclusion. What you’re left with is cash in hand for another investment or a down payment for your home upgrade.

3. Gut check the landlord role

   Managing tenants, handling repairs, tracking income and expenses - all of that takes real time. Even if it’s “just one house,” ask yourself: Do I actually want this responsibility? Or am I forcing a part-time job I didn’t ask for?

4. Zoom out to your full plan

   What does keeping this low-rate property do for your long-term goals? Is keeping equity in the house helping or hurting? If you sold and invested the proceeds, would your net worth grow faster? And does holding this home crowd out other priorities?

Meme of the Week

Wrap-Up

The 3% mortgage was a smart move when you made it. No one can take that win away from you. But holding onto the rate isn’t a plan if it keeps you stuck.

The better move is the one that aligns with your goals and not your nostalgia.

If you're making this decision right now and want help analyzing the tradeoffs, let’s walk through it together. Schedule a complimentary consultation here. I’ll help you lay out both paths side by side, look beyond just monthly payments, and choose the option that supports everything else you're working toward.

Reply to this email with any questions or thoughts that you have.

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