Help me get out of PMI...and "learn me" about portfolio loans

[Matt Rothwell]

I currently am owner-occupying a duplex and renting the other side out. I bought it with a 3.5% down FHA loan. This property doesn't cashflow with me living in it, but it allows me to live very very cheaply. I like it so far, but I'm paying almost $200/month in PMI that I'd like to get rid of. Around here, duplexes appraise very poorly because most duplexes are in the 'hood. My duplex is an oddity though, its "ITB Raleigh" and in a gorgeous area surrounded by million dollar houses. If it were a SFR home, it would be worth approximately 125% of what I paid for it last August. So with that in mind, I'd like to try some innovative financing strategies to get rid of PMI and lower my total expenses.

Here's my plan.  I'd like to try getting the place appraised as two separate units (condo conversion?), then refinance the two properties with a portfolio loan.  That should bump the appraised value up high enough that my remaining balance is less than 80% of the appraised value.  

Is that legal/ethical?  Is the interest rate on a portfolio loan so high that its not worth it?  What kind of LTVs do portfolio loans allow?  Would I get eaten alive in taxes?