We bought our house before discovering MMM and stupidly did so without a 20% down payment, thus requiring PMI. [Ducks first attempted facepunch]. When we did so we chose to pay the PMI premium upfront because it is cheaper after about three years of payments. [Willingly accepts a slightly less hard facepunch]. The lender required setting up an escrow account to hold funds for real estate taxes and homeowners' insurance. The escrow portion of my monthly payment is currently $363.11. Principal/interest payments are $822 (30 year fixed mortgage, original principal balance was about $162,000 at 4.5%). Loan to Value ratio is currently about 88%, using assessed value.

I recently asked whether it would be possible to eliminate the escrow account. The lender indicated that the escrow account requirement is tied to the PMI requirement and that the escrow account therefore cannot be eliminated until the loan to value ratio reaches 78%. Thus, the bank continues to gain the benefit of the time value of my money, which irritates me.

I'm wondering whether it would make sense to make additional mortgage payments to get the loan down the point where we can eliminate the escrow account but I'm having trouble thinking about how to analyze the value of doing so. Since we already paid the entire PMI premium, that is a sunk cost and I get no PMI savings by making additional payments. We would only get the benefit of the time value of the monthly escrow payment, which is not pure savings because we still have to pay taxes and insurance. We also do not make enough money to have post tax money left over after maxing out tax-advantaged retirement accounts. Thus, any funds that we used to make extra payments on the mortgage would be taking away from tax-advantaged retirement accounts. Assume a combined state and federal marginal tax rate of 22%. How do I weigh the time value of the escrow payments and interest savings of extra principal payments versus the value of the tax advantaged savings I would be foregoing?

My hunch is that I should not make the extra payments toward mortgage principal but I'm not quite sure how to go about doing the math. What do you all think?