Advice Needed - Payoff mortgage or keep the capital?

Question

Hello All!

Here a little backstory to my situation.  I went through an ugly divorce a few years back where she took over the rental property we had, I kept the house we were living in, and I had to declare Chapter 7 bankruptcy.  I will spare you all the entertaining details.  It's been 2.5 years since the discharge, and since, I began remodeling the house I live in.  I just signed a PA to sell my house and should have another one on contract soon for me to move into.

Here is my dilemma:  Once I sell my current house, I could pay off the new house and still leave me with 3-6 months of emergency funds, or put the 20% down and have a very manageable mortgage and keep more liquid funds.  I am temporarily downsizing and looking for a new house to be a good rental property once I move out.  I only want to do as close to conventional financing as possible until I am in a much stronger financial position.  Currently, I only qualify for FHA loans for another year and a half due to bankruptcy.  If I pay off the new house, I should be able to save $20K -$30k per year.  I am also looking to start investing strongly in Index Funds.  I see that there is a great opportunity both ways, including the ability to open a HELOC this summer once I hit the three-year mark.  Also, since I am playing it safe with mortgages, I would not be able to purchase another property for a couple of years until conventional loans open up for me.

What would you guys do?  I appreciate the feedback.

Account Closed · Answer

Hi @Alfonso Andolz, since you're in the wealth growing phase, I'd go with the low interest mortgage. It'll give you the liquidity you need to buy more investments in the near future. Once you have a sizeable nest egg, you can focus on paying off your existing debt. Best of luck!

Lawrence Dy · Answer

I agree with those mentioning financing the purchase. I also just want to add that since you are potentially in the process of repairing your credit due to the bankruptcy, financing a mortgage and having a history of timely payments for years may assist in qualifying for future purchases/investments and credit rebuilding. It's more of a qualitative factor to consider that may also translate into better savings/profits/investing down the road.

Alex Deacon · Answer

@Alfonso Andolz in my opinion its a no brainer. If you can qualify for a mortgage now the rates are 2-2.5%. You are borrowing money for almost free. Us that money and then bank the rest for now. You can always pay off the mortgage in the future.

Alfonso Andolz · Answer

I have to say that I have been lucky with my credit score.  I am back over 700 FICO, but you are right.  It will help me get back to my Excellent Credit Score I used to have.

Alfonso Andolz · Answer

It's so appealing to not have any personal debt, but I do see that the ROI would be far better with the loan.  Ran the numbers and ROI from the money saved from my downsizing would be about 200% after two years with a loan compared to about 16% by owning it free and clear.  That is a huge difference.  Plus the liquidity would allow more flexibility in the future.  Thank you both!

Still curious if anyone out there would argue differently, but I doubt it.

Advice Needed - Payoff mortgage or keep the capital?

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