You asked about interest rates, so I'll address that. You could think of this decision in terms of best/average/worst-case scenarios.
Best: the current reversion towards historically average mortgage rates reverses. Rates plunge back to low single digits, while the economy remains strong. Home values reverse their current slide and you gain a bit of equity. No major problems with rental or job loss. In three years you are able to refinance and save maybe $1200-1500 a month.
Average: rates remain near their current historical average. Home prices go sideways. Economy is mixed. You remain house poor, and miss the opportunity to go in on a down market. on the other hand, you have a cash-flowing rental at a good interest rate, but are stuck with 7-8 years of PMI on your new purchase and have limited liquid assets to deploy.
Worst: This is your nightmare scenario. Mortgage rates continue to climb, and/or the broader economy tanks. The good news is you have locked in a lot of debt at a "low" rate relative to the 9-18% mortgages we've seen in the past fifty years. The bad: home values have shrunk as borrowing costs increased, and nearly fifty percent of your net worth is tied up there. You will pay PMI forever, and will be blocked from refi-ing due to low LTV. Two other things are also likely to happen: inflation has continued (the likely reason the Fed has increased the rates that are fueling the high borrowing costs) and the rate hikes have pushed us into an unsurprising recession. Unemployment increases (this may not affect your job, but what about your tenants? CA isn't a landlord-friendly state), and your limited free dollars are eaten into. Instead of buying depressed equities, you may be selling them.
Obviously there's some more nuance than I've sketched out, but you get the idea. No one can say how likely each of these scenarios is but, if I can editorialize, I don't see much in the way of upside to offset the risks.
If you absolutely must upgrade, I'd suggest looking at the numbers if you sell property #1. Your loan looks late stage, so you're probably not saving too much on interest/tax deductions. You can carry the profits into the new sale (I think) without taxes, you lose PMI, the hassle of managing a rental, reduce your exposure to the mortgage industry, and have some extra to deploy into the current market. And you can still refi if that avenue becomes attractive.
You can't control the broader economy, but you can control your risk.
