Advice Needed - Payoff mortgage or keep the capital?

[Alfonso Andolz]

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.