Payoff rental or pay down to get out of PMI

[Tim Boeving]

Hello all! I have a rental property that has an ARM and a our current residence that has PMI. Question is do we pay down to get out of PMI or do we pay off the rental? PMI is about $90 and interest on rental is about $130 a month. My obvious thought is to pay off rental but just want to see why you all think and make sure I’m thinking about this right. Any other suggestions are great. TIA!

[Chris Mason]

Originally posted by @Tim Boeving:

Hello all! I have a rental property that has an ARM and a our current residence that has PMI. Question is do we pay down to get out of PMI or do we pay off the rental? PMI is about $90 and interest on rental is about $130 a month. My obvious thought is to pay off rental but just want to see why you all think and make sure I’m thinking about this right. Any other suggestions are great. TIA!

First, I'd suggest figuring out your PMI rate so you can figure out the effective interest rate. Suppose your PMI is $150/mo and the loan is $300k @ nominally 4%.

$150 * 12 / $300k = 0.6%.

So your actual effective interest rate w/ PMI is 4.6%. And you can drop it to 4% once it's paid down enough.

With this in mind, it should be easiest to see where the highest interest rate is. And one school of thought says pay off highest interest first.

Other school of thought is to pay off lowest balance first, so you can apply the improved cashflow to paying off the 2nd largest balance, and so on.

If both approaches point to the same mortgage, then your choice is done. If they point to different mortgages, then you've got to decide which matches your philosophy best.