I think the most important question has been brought up by many here - do you even want to be a landlord?
If you have no desire to be one, then your ultimate goal would be to sell, but you could still take out equity from your free & clear home for the down payment, but you would probably want to keep the costs to an absolute minimum (means a higher rate, but if it's only for a few months while it sells, not a big deal since you just saved thousands in closing costs).
If you have a desire to be a landlord and have a renter pay your mortgage for you, then if you were going to utilize the equity you'd want to compare different financing options (low cost & higher rate vs. lower rate & higher cost).
You also didn't say if you had enough of a down payment without utilizing the equity in your free & clear home, so it's possible that your income could qualify you for the new purchase, you have the down payment in the bank, and you wouldn't even need to do financing on your existing home in order to purchase the new home.
If you have the financial flexibility, and are at a point in your life where a little extra stress could do you some good, you could always do a test run of being a landlord for a little while, if it doesn't pan out, then sell the home and be done with it.
Bottom line is you have a lot of options to consider, and doing a gut check on if you want to be a landlord is going to be one of them.
Every lender is going to have a different way to look at making a loan on a 2nd home. Some may look at the new home as the 2nd home and require 20% down. Others may look at the current home as the 2nd home, but want to see 20% or more equity there. When was the last loan taken on this home? Lenders have seen people refinance their existing home, take the equity to purchase a new home, then dump the existing home on the market as a foreclosure. Therefore, they are looking at these scenarios closely.
Another thing to consider is do you want to be a landlord? Will you be financially able to cover both mortgages for 6 months if you don't have a renter? Or worse yet, you have a renter that isn't paying! It is not so easy to get a renter out. And by the time you spend to bring the home up par again, find another renter, etc..., is it more of a burden than you want to take on? If so, do you do the work yourself or hire an agency that specializes in rentals?
The best advice I can give is to discuss your options with a few agents, lenders and your accountant. There are different ways to approach this depending on what you decide.
I would welcome the opportunity to discuss more indepth with you.
Better Living Carolina Realty
Owning rental property is like having a business and much of it is tax deductible. One question is if you are better off investing in mutual funds--that has to do with your attitude toward risk.
One of the most important questions is location--is your house in a desirable location so that you'll have no trouble renting it?
Enjoy the process.
Please feel free to drop me a line.
I would love to discuss this with you. I don't think you can ever own too much real estate, its a great investment even with the troubles of the past few years. If you have no debt, I would try to buy what you want without selling the one you own free and clear. That really depends on several differnt factors.
Income to support a new mortgage, etc.
If you would like to discuss, please give me a call sometime.
My cell is 336-480-7847!
Thanks for the question!