Primary Residence: Hold or Sell?

[Ryan Lam]

Curious to get other perspectives on this topic. I’ve been throwing around the idea of buying another primary residence (upgrading), but the current mortgage rate makes it a little tougher of a decision. 

Background:

Young family living in CA (Bay Area). 
We own our current primary residence with a 30 year fixed mortgage at about 3.25%, purchased ~$1MM, worth ~$1.4MM.
We want to upgrade homes, planning for a growing family. 
Looking at ~$1.7MM-$2MM (interests rates do have some influence on this). 
We invest in real estate (buy and hold) out of state. The only real estate in CA is our primary. 

Options:

1. Sell the current primary residence, take advantage of $400k tax free (capital gains exclusion), use the proceeds to fund the down payment (20%) on the new house. Downside is that the new house is probably going to be just over double the current mortgage rate. 

2. Keep the current primary residence as a rental, liquidate other assets to fund the down payment on the new house. The positive side is that we hang onto a historically low interest rate, and would eventually cash flow sooner with rents rising over time (who knows how long). The downsides are that we aren’t too keen on owning rentals in CA given potential tenant issues, the lack of cash flow, etc. Appreciation, while nice, would also come into play on the new primary residence. 

I understand the part of the discussion which comes down to staying more invested in real estate versus other assets (primarily equities). 

The real question comes down to whether or not it makes sense to give up the low interest rate. So far, more signs are pointing to yes. 

- We would be able to upgrade our primary residence. Of course there is a non-financial aspect to this decision. 
- We stay invested for future appreciation on the new primary residence. If all goes well, we probably would live there another 5 years or so and hopefully upgrade again. 
- We take advantage of the capital gains exclusion. 
- We stay a bit more liquid, given it is easier to sell out of the equities we hold versus having to tap into equity if we kept the current primary residence. 
- We don’t have to be landlords in CA, at least not feeling like we’re stuck in that situation. 

Am I missing anything?