Hey folks, thought I'd toss this out here to get some ideas from the sharp cookies floating around this site.

Brief info: My wife and I have no debt except for our mortgage. No car notes, credit cards, etc. Nothing but the mortgage. I'm maxed out on my company 401k to the matching limit and we now have about $22k cash in an MMA savings account which is roughly 6 months of living expenses for us. We recently had our first child and now we need to start putting money aside for college. In addition, we're going to start saving money for a car so that when one of ours finally dies (probably within 2 or 3 years) we'll be able to pay cash for a replacement. And then of course we want to start saving some dough for a future house purchase as we'll probably outgrow (depending on future kids!) our current house in roughly 5 years. So yeah, lots of things to save for but that's ok!

In trying to think of what to tackle first, for some reason I thought about taking a good chunk of our savings and using it to knock down our mortgage to the point where we stop paying PMI. I'm not sure of the exact amount yet, but I believe it will take about $12k to do this. We would then fund back up our savings account to $20k.

So does anyone have any thoughts about this? Is it worth using about half our savings to get rid of the PMI or should I just "ignore" it and focus on my other savings and investment goals? If it makes a difference our MMA is getting about 5%, our mortgage is about 6.5%, and I believe our PMI is about $45 per month.

Thanks for your help guys!

How much has your house appreciated since you bought it? It might be possible to get an appraisal and use that to argue that you've surpassed the 80% LTV threshold and get the PMI removed that way. Not sure, though, as I've never done it myself (we did an 80/10/10 on our first house to avoid PMI).

Assuming PMI is 0.5%, that doesn't seem like a big amount. But since you can drop if after hitting 80%, the amount needs to be prorated to just the portion over 80%. Hence the formula ends up being something like 0.5% / ( 10 / 90) if you borrowed 90%. That calcs to 4.5%, add in 6% mortgage, subtract 25% for tax deductions and you're still in the 8% range for the tax equivalent rate. So definitely pay down the mortgage to drop PMI. (If you look at the formula carefully, the closer you get to 80%, the larger the % gets because .5% on the remaining 80% gets prorated over a smaller and smaller amount.)

I'd definitely get rid of the PMI. Before paying tons extra I'd do Nickel's suggestion.

Also, and this can be a touchy topic, I wouldn't start saving for your kid's education until you and your wife are both completely maxing out your retirement each year. You mention your 401k, but what about hers and what about Roths for both of you? That should come before education savings IMO. Your kid can get student loans to pay for their education. You cannot get loans to pay for your retirement.

Also, if you haven't done so yet, I would join Upromise. You won't make a million through them, but you may make enough over the next 18 years to pay for a book or two. I don't even have kids yet but I'm saving for their education through that program because by the time they go it'll be about $100k/semester.

Hey, thanks for the advice folks! But I'm afraid I've got bad news (at least for me). I just called the bank who holds our mortgage and because it was an FHA loan, the PMI is going to stay in effect until 5 years from the date of origination. That means even if I tossed a huge chunk of money at it to get the principal down below 78% the PMI ain't going anywhere until May 2009. That sucks but oh well, nothing I can really do about it. Well, we could refinance, but I doubt it would work out as our interest rate is actually 5.875% for the loan.

Guess, I'll start investing instead...

And on that note, regarding the Roth stuff, I'll probably start one up soon. I actually posted a couple of comments in today's main page article with a couple of questions about IRA's. My wife is actually staying home so no worry's on what to do with her income.

Again, thanks for all the help guys!

Don't forget to do a Roth for her too... She doesn't need earned income as long as you file a joint return.

Bummer about the PMI but at least you know now...