Afford Anything - Q&A: Sell Your Home or Stay Put?

Episode Date: June 18, 2024

Jessica and her husband are juggling two home sales and one home purchase within the next two to four years. How do they execute wisely while navigating a tight real estate market? Zerai works two jobs that both offer a pension and retirement plan. Can he take advantage of everything at his disposal or must he make some tough choices? Emily and her husband bought their home a year ago. But a national builder tempts them to sell and upgrade using a 3-2-1 buydown mortgage. Should they do it? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! TIMESTAMPS: Please visit the show notes at https://affordanything.com/episode515 Resources Mentioned: https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-youre-eligible-for-more-than-one-retirement-plan https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans https://www.stackingbenjamins.com/start-2024-right-with-goals-jon-acuff-1459/ Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, have you ever advised people who are taking out a mortgage that has certain dangers that they're unaware of? Dun dun dun. Right. I don't know what dangers are we talking about. Well, you know, you're familiar with the three to one buy down mortgage. Oh. That ominous countdown timer. Right.

Yes. Yes, yes, yes. And there are some surprises that can lurk ahead. Oh. We're going to talk to a caller who is interested in getting a three-two-year. 2-1 buy-down mortgage, but knows enough to ask about the unknown unknowns. But before we get to that question, we're also going to talk to a caller who has both a full-time and a part-time job and wants to max out their retirement contributions and is wondering whether

or not they can do so. And we're also going to talk to someone who currently has a primary residence in the Midwest. They have a rental property in Brooklyn. and they want to move to a different home in the Midwest. And so there's some juggling that needs to happen, and we're going to figure out how to put those puzzle pieces together. Sweet. Welcome to the Afford Anything podcast.

This is the show that understands you can afford anything, but not everything. Every choice carries a trade-off, and that applies to your time, your money, your focus, your energy, to any limited resource that you need to manage. This is a show that's all about optimizing those limited resources so that you can build wealth and live a more optimal focused life. My name is Paula Pantt. I trained in economic reporting at Columbia and I help you focus on what matters.

Every other episode, we answer questions that come from you and I do so with my buddy, the former financial planner, Joe Sal C-high. How's it going, Joe? That's going great, Paula. And you know what? I was so intrigued that while you were doing the open, I kind of cheated. I looked ahead. And like many episodes, we have.

this unintentional through line. We have this theme today, which I think we shouldn't spill that either. Maybe we'll circle back to that at the end. Ooh, stay tuned. Stay tuned to find out what the theme is. You know the other part, Joe, that I need to figure out where exactly to put this into the open, but one of the other parts that I really want to weave into the open somewhere is this new framework that I have just come up with around the five pillars of what we talk about. I have this redefinition of the acronym Fire. My original redefinition of fire was financial psychology, investing, real estate, and entrepreneurship. I've added another eye to that. There's a fifth pillar. It's fifth in the

sense that it's new, but it's second in its placement. And it's financial psychology, increasing income. Big important part. And then investing, real estate entrepreneurship. Financial psychology, it's that first piece. It's your mindset. It's the most important foundational piece. Then you've got to earn more money because if you're living paycheck to paycheck or if you're not making enough to be able to have the discretionary funds to be able to grow, then that's the puzzle piece that we got to solve. And then once you've increased your income, you've gotten your mindset correct, you've increased your income. Now you can move on to investing. The FI component is really foundational. Everyone needs to do it. And then the RE is optional and the RE is real estate

and entrepreneurship. And those are additional ways to grow, but those are optional. So FI is core, RE is optional. Or in this case, FIII is core. Fire. Yeah, yeah, it's fire. Fire. Yeah, yeah, exactly. So I'll find a succinct way to weave that into the open. Someday. Someday. But first, let's hear our opening question, which comes from Jessica. Hi, Paula and Joe. I love your podcast. And I love your podcast. And I love your advice. My husband and I own an apartment in Brooklyn, New York that we have owned since 2020. We moved somewhat unexpectedly in January 2023 to the Midwest, where we bought a small house for our family of four, which is me and my husband and our two very young children.

We are currently renting at our Brooklyn apartment, and we have $645,000 in a mortgage left on it with about $350,000 in equity. Our renters are moving out in 2025, and the we planned to sell the apartment at that time. Our little house in the Midwest has about $280,000 left on its mortgage with a 5.75% interest rate, and our monthly payments on that are about $2,800, including taxes. We plan to move out of this little house in two to four years because while it works for us for now, we know we're going to outgrow it quickly, and now that we know the area better, we have our sites set on a different neighborhood. The next house we plan to buy would be somewhere in the range of $800,000 to $1.2 million, and we hope to put down a hefty down payment to keep the monthly

cost slow. Assuming we get all of that equity out from the sale of our apartment, should we pay off the mortgage left on our little house and live practically mortgage-free for two to three years? Or should we invest that money in some sort of investment vehicle and leave our mortgage as is on the little house and just use the invested proceeds from the sale of the apartment for the down payment on our next home? Or is there something? third option that I'm not thinking of. If we paid off the mortgage and lived rent-free, we would still, quote-unquote, pay the mortgage amount to ourselves in either a high-yield savings account or investments or both. But my biggest concern with paying off the mortgage is that

the market in the area where we live has been super tight for several years with a very limited inventory. So I don't want to lose out on our dream home because we might have the contingency of selling our little house before we can close on a new one. Thank you so much. I really appreciate it. I feel like Paula Jessica's question is what I refer to as a beauty and the beast question. Remember the movie Beauty and the Beast? I love that movie. Did you know that was based on a true story? There really was a beast living in the woods in France?

There was a gentleman who had a medical condition that made him abnormally hairy. And he had an arranged marriage to a young woman. So that was the true story of Beauty and the Beast. He was so hairy that he traveled with the circus as a showbush. peace. Wow. So it was a sad life for the whole family. But that was the true story behind Beauty and the Beast.

Who are you? How do you know this? Are you going to start telling me about Star Wars next? I've never, never seen it. Yeah, there we go. Now she's back. Yes. You know, Beauty and the Beast, tale is oldest time, right?

Is that beautiful song? Tale is oldest. This is a tale as oldest time, Paula. Everybody's like, do I pay off the mortgage? or do I invest the money? And there's lots of different scenarios where this tale as old as time exists. Do I put extra money toward the mortgage? Do I invest it for retirement? In this case, moving to the Midwest and I'm building my life there. Now I know what life I want to live. Do we live mortgage free? There's so many different places where this seems to come up in financial planning

that I think most people are going to deal with this at some point. Do I pay off a debt? Right. Or do I invest the money? The first thing I want to address, though, is actually neither of those. I want to talk about her question for just a second because I think she did something really great. The average person is going to change jobs at least seven times during their career. That number might even be higher now than when I saw this a few years ago. But when you change jobs, there's a likelihood that you may change cities where you live. Certainly more people going online now.

So maybe not. But if you do, this idea that they bought a small house and now that she's lived there for a while, now she knows what neighborhood she wants to live in. A big mistake that lots of people make is they will spend a bunch of money on a new house in a city that they don't know anything about. And then a few years later, they go, man, I shouldn't have moved here. I should have moved someplace else. And those early years in a house, you can't get those transaction. cost back. And the issue with real estate is that there's a fairly high transaction cost. And not just

that. The Home Depot cost of fixing up the house, you know, making it the way you want it, a new paint, new whatever, like all of these costs associated with moving to a new house. Those are so big. So I love the fact that they didn't find their dream house right away. They move, they got to know the town. And now she's wondering, do we take the money from our Brooklyn property and now invested or do we leave it free? The math. So let's talk about this. I think there's two different things going on here. The math on one end says that you should invest the money. Because the reason real estate's a fantastic investment and the reason why real estate keeps up with the S&P 500 over long periods of time is not because the value property keeps up

with the S&P 500. It's because real estate is purchased with leverage and because you can then use that leverage to grow your money elsewhere and on the property at the same time makes real estate an incredibly attractive investment. But when you sink money into property and decrease your leverage, it's going to, especially your primary residence. Yeah, that's exactly what I was going to say. The math for a primary residence is different than the math for a rental property. A rental property is income producing, a primary residence is income consuming. It's going to slow it down. Well, it exponentially then slows down the velocity of that money when you sink it into a property.

Even if then that frees you up on a month-to-month basis. Now I don't want to worry about the mortgage. I can take that money. I can do whatever I want with it. Additionally, if she puts the money into the house and lives mortgage-free and says that I'm going to now take that money. and I'm going to use it in an investment manner. I'm going to invest it here.

We tell ourselves that all the time as people, and I will tell you we don't do that. Because now I feel this freedom with this monthly payment. I take the monthly payment in my brain, very smart my brain, says, I've got all these things I need to use it. For just a few months, I'm going to do something else, right?

And for people not watching us, I'm using air quotes for just a few months. because or it might be just for the first month, just for a month I got these other things that I got to clear up. And then it becomes just a few months. And then it becomes just for a year. And then you're like, oh, yeah, I was going to put that money someplace else.

Behaviorally, if we don't give ourselves that freedom and we automatically invest. This is why your 401k is such a great vehicle at work or a 457 is a great vehicle at work, because it's automatic. If we make it automatic, a mortgage payment is beautiful because it's automatic. We automatically then save it. So using that monthly number, can it work? It absolutely can. And that freedom is a fantastic freedom, but behaviorally, I've seen people not do that.

This is so multifaceted. And I know people are waiting for Joe to actually answer the question. But there's another issue here, Paula, before we answer the question, which is we also have to peer into this idea of a dream house. Because I agree. Questioning the premise. Well, yeah, I agree with the idea of a dream house from an emotional perspective. I get emotional. I love where I live.

Paul, you've been here. I love my house. Yeah, it's freaking gorgeous. It is a nice place to live. Everybody, go to Texarkana. Come stay at my house. It's a great place to wake up every day. I love it.

If you were looking at it from an investment perspective, it's a horrible idea. But it's a fun place to be. And so this is an emotional. thing that we're talking about. We're not talking about investing. We're talking about emotions. And the idea of a dream house presupposes that there will be a soulmate house. There will be this house. I will see the house. The house will see me will fall in love. Tale is old as time. It'll be fantastic. I'll love this house forever. But in some ways, it's actually more like Warren Buffett said about investing, which is even when it comes to buying a house,

there's no such thing as a called strike. So if we take the emotion out of it, I can let a house I love go. And even in a city as small as Texarkana, there's probably 40 houses in Texarkana. I would love to live in as much as this one. There's probably more than that, right? There's a ton of houses. So I just have to acknowledge the fact that this is also an emotional decision. And it doesn't make a good or bad, Paula, but emotions, when you start talking about,

I don't want to miss out of my dream house. You're acknowledging the fact that emotions are going to play into this decision and not just investing. Our rational mind isn't going to be the only thing that's activated in this decision. So this is a little bit of know yourself. So when we talk about know yourself, should I invest the money? The answer is if I know myself and I know I'm going to be emotional about this, having this money so I don't miss out on my soulmate house. don't pay off your mortgage with the proceeds of the sale from Brooklyn.

The cool thing is when we actually look at this from a mathematical perspective, this also is on that line. From a mathematical perspective, not investing that money into your current mortgage also is going to be, I think, a better move, leaving that mortgage the way that it is going to be a better move. So from where I sit, I think paying off the mortgage in this particular case is a mistake.

I don't always think it's a mistake. In fact, there have been plenty of times on this show, Paula, where I've said pay off the mortgage, the freedom from worry. There's this book that I love by our friend West Moss called What the Happiest Retirees know.

They go against the math. They pay off the mortgage. And I agree with that. I think that's great. Sometimes the math is not where you need to be. In this case, I think the math lines up with the behavior that she expressed by saying dream house.

Joe, your answer is precisely the same as mine. The reason that I didn't chime in is because I wanted to know what you were thinking. And my thoughts on this changed at the end of her question. Oh, that's funny. When I initially heard her question, when I heard the bulk of her question, my original thought was, yeah, she may as well pay off this mortgage because of the fact that her mortgage is currently at 5.75%. The risk-free return, if she were to put that money into, let's say, treasuries or some other type of risk-free or low-risk type of asset, is not going to beat that.

And so, given that paying off her current mortgage has a guaranteed 5.75 return on that investment, Why not do that? That was my answer until the very last sentence that Jessica said, which is that she was concerned about losing out on her dream home because of a home sale contingency due to the fact that the area that she lives in has incredibly low inventory and has had limited inventory for years. The moment that she said that, my answer flipped. And the moment that she said that, my answer to Jessica is don't pay off the mortgage. Keep this money available so that you can buy that next home. The overt reason is her stated reason. She shouldn't miss out on the purchase of the next home due to a home sale contingency,

which is another way of saying, by virtue of paying off the mortgage, she loses liquidity. And what she wants is to optimize liquidity for the sake of that next home purchase. The underlying reason, however, is Joe aligned with your answer, which is that there is a mathematical answer and a behavioral answer. And the moment that she talked about, prospective regret, I don't want to miss out on her dream home. So it's anticipatory regret, right?

And the moment that anyone voices anticipatory regret, you know that it's an emotional decision and therefore should be made based on behavioral factors rather than a mathematical decision that would be made using a spreadsheet. I think there's one more portion of this, which is, I think, think the path of least regret is also instead of, instead of framing your rubric around what's

the best answer, I think a better rubric often is how can I best achieve what I want to do, especially if it's emotional. And what's funny, Paula, is that at the beginning of the conversation, I thought she wanted to pay off the mortgage. Like, I got the feeling that that's what she wanted to do. So my bias was, okay, let's see how we make that work. Not sure if it's good or bad, but let's see how we can make that work. And at the end, to your point, when she said, dream home, now I know what she wants to do. And I think it not only gave us a lot of flags about how this decision is going to be made emotionally and behaviorally, but also, I think finding the way to do what you want to do is often so, so much better than doing the thing that you, quote, think is right, is the optimal move.

because the number of times I had clients that would second guess the optimal move, and they didn't second guess it whether it was optimal or not. They second guessed it whether it was actually right for them. If you begin with what's right for me and then work backwards, I think you're going to make a better decision. The reason that I want to make a distinction between the answer that I have for Jessica versus the answer that I might have for any other member of this audience who's going through a similar question is to emphasize that Jessica's specific circumstance

of living in an area that has limited inventory and having a strong desire for a very particular type of home within this limited inventory context, that particular circumstance means that my answer to Jessica is going to be different than the answer that might fit some other person who's listening to this podcast right now who is in a similar situation, but living in a different city or town. that other hypothetical person might be better served paying off the mortgage. But Jessica specifically, I think if she were to do that, that would be a mistake for her. Think about the regret.

Again, yeah, anticipatory regret. She's already feeling it. She's imagining what might happen and she's already feeling regret due to lack of liquidity, right? in that imagined scenario, that highlights the answer right there. Bam. And this is an important opening question because it emphasizes the importance of that first F, financial psychology, right? It emphasizes the importance of behavioral and emotional considerations when making

these decisions that appear on the surface to be mathematical. That's where personal finances distinct from corporate. finance. It isn't just in the relative simplicity of personal finance as opposed to corporate finance. It's also in the fact that behavioral and emotional considerations are inseparable from the rubric. I'm reading this book right now. It's called Finance for Normal People by Mir Statman. He talks about how standard ideas about finance that emerged in the 1950s. argued that humans are rational and make decisions that are in their rational best interests, and that any deviation from that is irrational behavior.

Where the field of behavioral finance and behavioral economics has evolved is the argument that people are not rational, people are normal. And normal people have mental models that strictly speaking do not make sense in the cold light of a spreadsheet. It's super interesting because as you're speaking, I'm thinking that you have these two paths in front of you. You can make the decision thinking that I'm going to be able to shove these emotions in a pocket and not have them affect my decision, which I think often we try to do.

When I was a financial plan, I worked with a lot of engineers. Engineers are specifically susceptible to this. I will take my emotions. I will shove them in my back pocket. They will not factor into this. It's going to be spreadsheet only. and I will go with whatever the spreadsheet says. And I think somehow those emotions always find a way to escape that pocket and they come out

in a myriad of ways. Right. Or we can say from the very beginning that I know my emotions are going to factor into this decision. And I love your word anticipatory, but I think we can use anticipatory not as a defense, but as a weapon, you know, to say, to say, if I anticipate what my emotions are going to be around this, then I can use my emotions as a tool to help me not just not regret the decision, but even to make a better decision for me.

Like not regret is making sure that I don't fall below zero on my emotional line. You know what I mean? If emotional neutrality is zero, trying to avoid that regret means I'm not going to fall below zero, but I can actually go above zero into emotional positivity range. And if I know ahead of time, what's going to spark the most joy? Well, then I know that. People got to go back and listen to past episodes to get that one. But if I know what those are ahead of time, Paula, I can then use it in my favor. People might wonder, okay, how do I do that? Like, how do I know which one is going to spark the most joy? And I think that's scary for a lot of people, like looking,

off into the void and going, how do I know that? But I think there are clues. I recently spoke to John A. Cuff, who is a big motivational speaker. He goes off down these rabbit holes to think about what really lights us up. And he really, when he and I were speaking, got into this discussion around don't look forward. Your breadcrumbs are actually backward. And there are three different avenues to look at who are the people where are the places and what are the things and start listing out just what are those things that gave me joy in the past who are the people that i like being around and are there any commonalities are there places that i prefer to be i talked about how much i like waking up at my house there's one of them for me right and then third is are there things that bring me

bring me joy and you will either be a people places or things type of person and by following those clues, those might not lead you immediately to what's going to light you up next, but they're a much better indicator of the hole you need to look down to shine a light in to get some clues as to how that's going to work in the future. I found ever since I started applying that since I talked to John at the beginning of the year, that's really been helpful for me. So in Jessica's case, the middle question within that people places things, the places would help guide her decision around. What precisely is that dream home?

Yeah. What does it look like? Where is it? What do you do in it? And we had a guest on the show who talked about visualizing specifically when you wake up. What's the first thing you do? Do you brush your teeth? Do you use the toilet?

What's the next thing? Do you make coffee? Where do you drink that coffee? What do you listen to? while you're drinking that coffee? Where are you sitting? What's the view? Really go through that as you determine what is your dream home? What does the day-to-day experience of that dream home look like? Thank you, Jessica, for asking that question. Best of luck with the next purchase. In just a moment, we're going to answer a question from a caller who has two jobs, one full-time, one part-time,

and wants to max out his retirement accounts for both. Can he do that? We're going to tackle that in just a second, But first, we're going to take a moment to thank the sponsors who allow us to bring you financial information at no cost to you. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech hustle that got them named one of America's most. innovative companies by Fortune Magazine. That's what being a fifth-third better is all about.

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But don't wait. Like leftovers at midnight, our Black Friday offers won't last. Shop now at IKEA.ca.ca.com. Bring home to life. Welcome back. Our next question is from Zerai. Hey, Paula and Joe. Thank you very much for all you do. and teaching me all these time about different types of investment and all that. I have a full-time job and I also have a part-time job that I started a long time ago. So my full-time job has a pension and 457. And I max out my 457 on my full-time job contribution. And then my part-time job also has a pension and also as a 401K contribution.

And I thought I read somewhere where it says since there are two different entities, both a non-profit, it, I should be able to max out my 457 and then also the 401k on the part-time job. This is from the employee contribution, not the employer, the employee contribution portion of it. And I cannot find any clear answer in a lot of places. And I just want to see if you and Joe be able to help me. My question again is that can I max up my 457, my government estate job, and then also put a certain amount on my 401K from the part-time job. both for employee contribution. Thank you very much. I appreciate all your help in teaching.

Osirai, thank you for the kind words and also thank you for this question. And again, Paula, and this is not the through line I was thinking of earlier, nuanced answer again. So you are spot on because of the fact that the 401K is a qualified financial plan and the 457 is a non-qualified financial plan directly from the IRS website and Paul, I'll give you the link so you can put it in the show notes for everybody. You can contribute to both. Now, here's the deal. The 401k, because it's a qualified plan, you have to aggregate all of your financial plan contributions no matter where they are. So if you're somebody thinking you're in this position because you're in a simple 401k in one area and you're in a regular 401k with another employer, it's 23,000 for both in 2024,

total between them both because they're both qualified plans. So ask your HR professional, is this a qualified plan or look at the plan documents if they're qualified plans that you put money in, the most money you can put in is $23,000 into those plans. $457 is different because it's not qualified. So Paula, that brings up the second piece. Well, why is this different? Non-qualified brings up a little ugliness, which is that if anything happens to this institution where the plan is, let's say it's with a state government or a municipality, and that municipality declares bankruptcy, the state declares whatever it might be. If the worst happens, this money could be.

subject to that bankruptcy, meaning your retirement money could go by-bye because of the creditors to that entity. Does that mean that there's a big chance of that? I would definitely do a little bit of research and find out how financially solved and wherever this is located is. I would dive into that. I know that in fact, it is rarely, rarely, rarely ever have. And so the risk of a 457 going by-bye and this not being your retirement money, in fact, probably very, very, very low. However, I think you need to know that. I think you definitely need to know that this might not be your money. 401k, no matter what, is your money and is protected as your money.

There are some other rules that you need to know about a 457. Let's start with the cool side, Paul. This is really neat. If you are eligible for catch up contributions because you're an older saver, you can put additional money into this because of the fact that the government said, hey, if you even put enough in when you were younger and now you're really throwing cash at it, you can throw more money. It's even more with a 457. A 457 allows you to also put in funds to make up for money you didn't put in when you were

younger. And I won't get into the granular details of this. But if you've been eligible for a 457 for a long time and you didn't max it out every year, you might be able to make up for all those lost contributions that you didn't make as well. So you can not only max this thing out, you can bay, I mean, you can just shovel money into that 457. That's, that's incredible, because most retirement plans do not allow for anything like that. Most, most plans are use it or lose it. Now that's a catch up contribution. Without the catch up provision, so I want to back up for just, without the catch up contribution, there is a negative piece to the 457, which doesn't exist with a 401K. 401K, that 23,000 number, Paula, is your contribution, right? $23,000 a year is the limit

before we get to any of this catch up stuff. With a 457, it's the combination of you plus employ, it's any money that goes into the plan. No matter who put it in, it's $23,000. So $23,000 is still, the number, but if your employer is doing any type of match, that's going to be included in the 23,000. So you can put in 23,000 on the 401k side. Then your employer matches it on top of that, not included in 23,000. 457, you put in your money and employer match those count toward the 457. Then if you're old enough for catch-up contributions, you can make a catch-up contribution in the 401k side. and then you can make a mega wham possibly catch up contribution on the 457 side.

So multifaceted, there's a lot going on here because of the fact that the 401k is qualified, I would be biased toward filling that up first if you can't fill up everything. And then I would go to the 457 second because of the non-qualified nature. of that. But there's another nuance here, which is then we need to look at the fund selection inside, right? It's the 401k's garbage and high fee funds. And the 457 is nice, low fee, well-rounded approach, the stuff I need to get to my financial independence vision. I might go, okay, I know the Achilles heel, the 457, this is non-qualified, but I might start there first. But I'm biased toward the 401k and away from the 457 because of the qualified versus unqualified.

nature of those two plans. So there's our nerdy answer, Zerai, but man, the fact that you got both of these available and you want to max them both out, have at it, buddy, have at it. Paula, what I like about this question, and this is another through line that I hadn't thought about with Jessica and with Zari, the answer is much more nuanced than you might think when you first hear the question. Right. Often, it's either in Jessica's case, what do you want to do? It's Zari's case. It's how do I take these two jobs and make them really work for me in the best way?

And by the way, imagine that Zari wasn't focused on retirement. If he wasn't focused on retirement, because he knows what this retirement plan is, does he change the goal? Because he has this thing that a lot of people don't have. Like if you go to work for a company, Paul, and you've got these amazing benefits, but they don't have anything to do. with what your number one goal is. Do you change the goal to fit the game that you're playing? So our retirement plan is essentially a deal between you and the government in which you agree to not tap this money until a particular age in exchange for the government giving you a tax advantage.

The fact that you have the opportunity to capitalize on a tax advantage is not in and of itself a reason to put your money into that type of account and to lock it away until you reach a given age. There are two things that I want to establish here. First, a retirement account is not for retirement per se. Retirement is an occupational description. So it is not a retirement account. It is an age restricted account. That's the first thing to establish. The second thing is that just because you get a tax advantage that has the condition of an age restriction doesn't mean that you should necessarily take that tax advantage to do so would be letting the tax tail wag the decision dog. In a hypothetical world, if Zari was not concerned with retirement, if he had some other goal, let's say he wanted to start a validated yet

capital intensive business, and he needed funds in order to do that, right? That would be an example of a goal in which he would need short-term use of that money, and locking that money away into a tax advantaged account would work against his pursuit of that given goal. Similarly, if Zari had goals, any goals within a relatively short-term time frame, even five years or 10 years, right? If Zerai had specific goals for that money that did not work with the age restriction of these accounts, then why work against your own goals just because you have the chance of getting a tax advantage? It doesn't make sense in the broad.

scope of things. We can even, Paula, flip that upside down when I was working with people in their 50s and they had goals that were after 59 and a half, again, that we call it a quote, retirement account. If my client had enough money to be financially independent, often left to their own device, they wouldn't think to put more money in the 401k or the 457 toward this goal that they had at age 65 because it's not a quote retirement goal. They'd open up a non-qualified brokerage account and do it that way. Instead, if you're not maxing it out and I want to, I want a vacation home, but I don't want to tell I'm 65, why wouldn't I use the Roth portion of the 401k account, get the tax-free

benefit of that account toward this vacation home that I want to buy after that age restriction? I love what you're saying here that just because it says that this is a quote, retirement account doesn't mean we need to use it that way. Yeah, yeah. If the goal fix the account, let's let's use it. Exactly. Exactly. A lot changes when you simply reframe it into an age restricted account rather than a retirement account. Wonderful. Wonderful. In Zerai's case, he's excited about those age restricted savings, age restricted investments. And so the good news for him is he's got lots of opportunity. Oh yeah. And that little hidden feature that you can go back

and make up for contributions you didn't make in the 457? Wow. Wow. Incredible. Yeah, that's a rare opportunity. Thank you, Zerai, for asking that question. All right, now we're going to get to our big question, which is about the hidden dangers that may be lurking in a mortgage opportunity that three years ago people never talked about, but that today you hear about a lot. So we're going to get to that question in just a moment. But first we're going to take one final pause to hear from the sponsors who allow us to bring you financial education at no cost to you. Hack the holidays with the PC Holiday Insiders Report. Try this PC porquetta.

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Precision crafted to navigate every corner of my mouth. All for just $18. Okay, okay. Try the season's hottest flavors from the PC Holiday Insiders Report. Please feast responsibly. Our final question today comes from Emily. Hi, Paula. My husband and I have been living in our current home for a little over a year.

We locked in at a 5.125% interest rate and have about $266,000 in equity. 13 more years than this home would be paid off. But our home is pretty small, and while it works for right now, as our son gets older, we can see the need for moving to a larger home. The area we live in is really expensive, with limited land to build new homes. Right now, we can get a new home from a national builder for about $900,000 to a million. That would suit our long-term needs. The builder is offering a 3-21 buy-down on the mortgage, where the first-year rate would be $3.99,

the second-year rate would be $4.99, the third-year rate would be $4.9, the third-year rate would be 5.99, and then from years 4 to 30, it would be 6.99. If we know we want to live in this area for the long run, does it make sense to sell our current home and move now? Emily, thank you for the question. Now, before we answer your question, I first want to, for the sake of everyone listening, elaborate a little bit on the concept of a 3-2-1 buy-down, and then I'm going to talk about your specific situation. So a 3-2-1 buy-down, again, this is the type of mortgage that a couple of years ago nobody was talking about and now everyone's talking about it. And the structure of a three to one buy down is, as you've given an example of within your question, in year one, the interest rate is

reduced by 3%. In year two, the interest rate is reduced by 2%. So 2-2. And in year 3, the interest rate is reduced by 1%. So as a easy way of thinking about it, just think the 3 and the 1 are in an inverse relationship with one another and the 2 matches the 2, right? And then starting year four moving forward, the lender charges the full interest rate for the remainder of the mortgage term. So in essence, it is a variable rate mortgage. Now, a variable rate mortgage is different from an adjustable rate mortgage. We're getting a little into the weeds here, but essentially there are a few different types of mortgages that you can choose from. There's the fixed interest rate mortgage, which I think most of us know what that is. You have one steady rate

for the entire duration of the term. And Emily, that's what you have with your current mortgage, your 15-year mortgage with a 5.125% fixed rate. There's also an adjustable rate mortgage in which your payment amount adjusts periodically. And then there's a variable rate mortgage, which is what a 3-2-1 buy-down is, where it's different from an adjustable rate in that with an adjustable rate, you don't quite know where the mortgage interest rate is going to go. There is a certain maximum cap, so you know what you're working.

case scenario is. And the adjustment happens periodically so that you know the schedule during which it will change, but you don't know exactly how much it's going to change. And that's different from a variable rate mortgage like the 3-2-1. Again, this is a relatively unusual and little-known type of mortgage that a few years ago no one talked about. And now these types of mortgages are becoming increasingly popular because builders are offering these as incentives to get people to buy because we are now in a situation where most existing homeowners have golden handcuffs and don't want to go from a lower mortgage interest rate to a higher mortgage interest rate. And so this is a way of softening the blow for people in that golden handcuff scenario.

Which I think raises the important point. I think that if she does this and we can dive into that more later, Paula, but if you do it, I don't think that you can make this decision based on the blow softening portion of this loan. You have to look at those later years in the full frontal attack of how that's going to affect your cash flow later on. Yep. That's exactly what I was going to say. So the thing that strikes me about Emily's question is that the bulk of her question, focused on the mortgage itself, right?

She said she's got a 15-year mortgage. They bought this home a little over a year ago, so they are really new into this home. They more or less just purchased it, to be in your home for only a year and to already be thinking about selling that home and moving into a new one and shouldering all of the transaction costs

that come with the purchase and then later the sale of a home. That's a very rapid change. And certainly in the future, as Emily said, in the future they want a larger home to hasten that move purely on the grounds of having the opportunity to lock in a variable interest rate, that in and of itself does not seem like a sufficient reason to hasten a move. Because, Emily, once you move into this new home, assuming it's a more expensive home than the, the one you're currently living in, everything from your insurance costs to your property tax costs to even the cost of utilities, assuming it's larger square footage, all of those costs are going to rise. So the moment that you move to a different, larger, more expensive home,

you're going to be paying all of the costs associated with maintaining that bigger home, the heating, the air conditioning, the property taxes, all of it, the insurance, all of that, right? If you can save yourself those costs by living in a smaller and less expensive home for as long as you're happy with that home, why wouldn't you do so? I don't see the 3-2-1 mortgages being a compelling reason to upgrade your lifestyle sooner than you need to. No, what it does, though, is it shows us the builder's motivation, though, which I think is an important thing when we're talking about negotiation, which I want to get into here in a second. But before that, I think, Paula, this is exactly why I don't even start this

discussion here. I don't start with this. Is this a good deal? I don't start with anything. Here's where I start. This goal, because it's more expensive than where you currently are, is directly competing against your other goals. So my question then becomes, not this goal, how am I doing toward those goals? because if I'm doing great toward those goals, then by all means, if this makes you happier, let's do it. Let's do that right now. If it's not going to affect your retirement goals, your other goals, whatever those are, then let's do that. But if this is going to make it so you can't put as much money toward reaching, let's say, your financial independence goal or any other goals you might have. And those have.

College savings. Yeah, if that's the thing, like whatever it might be, if this directly, affect, which it will, if those aren't already spoken for, then certainly I'm, I'm then putting this off, assuming that, Paula, to your point, that you're happy living where you are. And I make that move at the time that suits you best versus taking advantage of this carrot that the builder's putting in front of you. That's where I start this discussion. Not with, is this good or bad? How does it affect everything else. And my answer for Emily is going to be different than my answer to, you know, any other hypothetical person in a similar situation. Because what Emily expressed in her voicemail is that

the home that she and her family are currently in works for them now. They are happy with it now. They anticipate that in the future, years from now, there may come a time when it no longer fits what they want. And so in the future, and she didn't indicate how far into the future that is, but maybe two, three, four, five years from now, at that point, they may want a larger home. But given the fact that their current home, they just bought it a year ago, right? They're so new into that current home. Clearly, one year ago, at the time that they bought it, they had anticipated living in it for longer than a year. You would never buy a home if you only anticipate living in it for one year, right? So clearly, as recently as a year ago, they anticipated living in this current home for at least, I would guess, three or four years, if not longer, five, six, maybe.

The fact that they're thinking about changing course now is not due to a change in circumstance. It's not due to an unhappiness with the current home that they're in. Quite the contrary. They're happy with the current home that they're in. They're just thinking about hastening the upgrade because they have a variable interest rate. that's been presented to them. So let's go into negotiation then, Paula. Builders have a reason why they're offering these incentives.

And if a builder comes forward that they have this incentive, they will often give you other incentives as well. And anyone that's bought a new house knows this, that this is an area where you can negotiate. I can't walk into Target and say, I don't want to pay this amount for Cheerios. I want to pay less. Target employee is going to look at you and go,

I can't do that. when you're talking about a new home purchase, you might be able to, because they've already told you that, hey, we're giving you these incentives, you may be able to negotiate even more incentives. So Paula, I think that if the other goals are spoken for and she's able to get potentially a better deal now than she might be able to get five years from now that I may lean the other way, but I'm still not starting here. But I think this idea of knowing how to negotiate. negotiate really could factor big into her being able to, well, and let's take the five years off the table.

Let's say that the builder's offering this and she's ready to go. Like being able to negotiate these incentives, I think she is the potential to be even more in the driver's seat than she thinks she is. And bear in mind, Emily, if you stay in your current home and you, let's say three years from now, decide that that's the appropriate time, to move into another home. Number one, we don't know what interest rates are going to be in three years. And there is at least a reasonable chance. You know, I don't want to make any predictions, and it's premature to make predictions three years into the future.

No board member of the Fed would even do that. But there is at least a reasonable likelihood that interest rates in three years will be low enough such that you could potentially match or even beat the 5.125 fixed rate that you have today, right? That's not a tough rate to beat. It's not like you've got a 2% or 3%, right? You've got above 5%, and that's on a 15 year, which a 15 year always has lower rates than a 30, right? You have a 5.1 on a 15 year. I don't think that's unreasonable to beat in a number of years from now, assuming inflation is under control by then.

So there is, probabilistically speaking, a good chance that you can have the best of both worlds. You can stay in the home that you just bought and enjoy the lower costs associated with living in that home for as long as you're happy being there. and by virtue of doing so, that frees up cash that you can put towards other goals, to Joe's point. And then when you're ready to make the move, when you're actually ready and not just wanting to capitalize on a builder incentive, then you can do so and potentially lock in an interest rate that's theoretically close to what you have now. But I think this is a great discussion around not just what we do, not just the decisions that we make, but the when. Because in financial planning, the when is as important as the what. So, thank you, Emily, for asking that question.

Enjoy the home that you just bought and then reassess when you want to make that next move. When you get to the point where you're unhappy with your current home, that's when you know it'll be right. Well, Joe, that comes to the end of today's episode, but where can people find you if they would like to hear more of you? Oh, you can hear me and my friend Paula at the Stacky Benjamin Show. We call it the greatest money show on Earth because we will combine very serious discussions about medical tourism with cat asthma. And you have to go back and listen to the Stackin' Benjamin show to know what the heck I'm talking about. Back at the beginning of the year, I spoke with the man I referenced earlier, John Acoff. It was a fantastic discussion about that.

How do we figure out what's going to light us up in the future? Everybody talks about leaving a legacy and that freaks a lot of people out. Well, instead of thinking about leaving a legacy, John dove into the first week of 2024, a better way that we talked about on today's show. So find that back the first week of 2024 at stacking Benjamins. And you can hear that entire discussion. We'll link to that in the show and show. If you can send me that link,

we'll just put it in the show notes i can do that well thank you thank you oh we didn't talk about the through line by the way oh done done so what it what do you see the through line as being i thought that uh it's the fact that all three of these questions were nuanced that at the beginning of the discussion when people first heard these questions i bet everybody listening to this thought oh i know what they're going to say or I know exactly where this is going to go. And there were these offshoots that we didn't expect. You know, for a lot of people paying off the mortgage is a fantastic idea because the freedom from worry, the idea that it's one less thing in my life, it makes more people happy to have less debt, we went against that. And then the idea that most

people don't know that the 457 plan has both this Achilles heel, but also for people trying to make catch up contributions, this wonderful benefit that who knew, right? The ability for him to do both, much more nuanced, I think, than a lot of people knew. And then this idea of, hey, I got these wonderful incentives from this builder and I can get into this house today that who knows a few years from now where I'm going to be. But really thinking through that, much, much more nuanced than we thought that it was. So maybe a tale not as old as time. Well, actually, the story of beauty and the beast is a more nuanced story than the one that's

told in the Disney cartoon, right? The true story of beauty and the beast, that true story is much more nuanced. So the man's name was Petris Gonzalvis. And his genetic condition was called hypertricosis, also known as Ombrossus syndrome. syndrome or ambrass syndrome defined by an abnormal amount of hair growth. And so in the case of Gonzalves, it affected his entire body. It's a syndrome that is informally known as a werewolf syndrome. Wow.

And he was married to a woman named Catherine in 1500s, France. I love that because even the point of the story is life is more nuanced, right? This person isn't who they, even in Beauty and the Beast, the Disney version, that everything's not what you think at face value. Exactly. Things are different, but it's even more different. So nuance. Nuance was the through line of today.

Well, thank you, Joe, for spending this time with us. Well, thank you, Paula. If you enjoyed today's episode, please do three things. First, share it with a friend or a family member. That's a single most important thing that you can do to spread the message of great financial literacy and financial health. Second, subscribe to our newsletter. which we are reviving afford anything.com slash newsletter. And that newsletter is going to be based around the five pillars that I talked about early in this episode,

financial psychology, increasing income, investing, real estate, and entrepreneurship. So afford anything.com slash newsletter. And third, make sure that you're following us on both Apple Podcasts and Spotify, as well as any other preferred podcast player that you like to use. while you're there, please leave us up to a five-star review. Thank you again for tuning in. This is the Afford Anything podcast. I'm Paula Pant.

I'm Joe Solci. Hi. And I'll meet you in the next episode.