You pay $155/mo and need to pay down $46.5k more to eliminate it. Paying it off would save you $1860/yr, which is a 4% return on the $46.5k. Plus, of course, the 4.25% of the mortgage rate, making 8.25% return overall. That's a **guaranteed** 8.25% return, and you're unlikely to find anything as nice as that in the market.

PMI posts are my pet peeve on this site. Fuzzy math like this is rampant in PMI posts, and it paints a false picture not only of this specific scenario but of money in general as having no time value. I still think you should pay down the PMI, but the above quoted 8.25% might be a bit too small (if you sell the house relatively soon) or much too big (if you keep the house for more than five years). For the sake of clarity, when I use the word "return" in this post I'm talking about the marginal nominal annual internal rate of return compounded monthly on just the extra payments.

The largest return will be achieved if you don't roll the PMI payments into the mortgage, but instead realize them as "income" (that is, as a reduced expense equivalent to income) as they occur. In this post I'll assume that eliminating PMI generates income in this way (that is, you don't snowball the PMI payments into the mortgage after PMI is gone). I'll further assume that the $800 extra payments will only last as long as the PMI in order to isolate the effect of PMI pay-down (note that the examples below are valid whether or not extra payments continue after PMI is paid off, but such payments will earn a return equivalent to the APR on the loan and are therefore uninteresting and unrelated to this thread).

The biggest factor in determining your return is how long you will need to wait between eliminating PMI and realizing the resultant difference in the balance of the mortgage under the accelerated payment schedule versus the standard payment schedule as increased "income" (as defined before).

For example, it sounds like you will now be making 24 PMI payments under the accelerated payment schedule. Let's assume that you would have made 48 PMI payments under the standard schedule. Therefore, 24 monthly payments of $800 generated 24 monthly "income" payments of $150. Additionally, the $800 principle payments reduced your mortgage balance by 800*((1+.0425/12)^24-1)/(.0425/12)*(1+1.0425/12)^24 = $21,774.00 over four years. However, this reduction in the mortgage balance isn't really worth anything unless your planning on using the debt reduction to take on more debt or you will be selling the house for a profit or you will be paying off the mortgage in full at that time.

For the sake of argument, let's assume you did sell four years from now. Using Excel's IRR function, I can find that the actual return on the extra payments would be

**9.83%**. That's a great return, but it's only correct if you use the lower mortgage balance four years from now.

On the other hand, let's assume that you neither take out any further home loans nor do you sell the house before the mortgage is paid off. If it take you 20 more years (240 months, exactly) to pay off the mortgage under the accelerated payment schedule, then under the standard payment schedule you will still owe 800*((1+0.0425/12)^24-1)/(0.0425/12)*(1+0.0425/12)^216 =$42,927.62 at month 240. At that point, you will realize monthly "income" equal to your mortgage payment until the month where the standard schedule would have paid off the mortgage. Focusing only on the principle and interest portion of the mortgage, let's assume that your payments are $1,900, and the standard schedule last 24 additional months. In this scenario, 24 monthly payments of $800 were immediately followed by 24 monthly "income" payments of $155 followed by 192 months without payments followed by 24 months of $1,900 "income" payments. Again using Excel's IRR function, the actual return on the extra payments would be

**5.3%**. That's still high enough to justify paying down the PMI over investing, but not nearly as high as quoted in the post above nor as high as in the example I previously worked.

Splitting the difference, let's assume that you sell the house for a profit in ten years. At that point you will have 800*((1+0.0425/12)^24-1)/(0.0425/12)*(1+0.0425/12)^96 = $28,085.86 in increased equity. In this scenario, 24 monthly payments of $800 were immediately followed by 24 monthly "income" payments of $155 followed by 72 months without payments followed by one income payment of $28,085.86. Again using Excel's IRR function, the actual return on the extra payments would be

**6.3%**. While that's certainly a worthy (almost) guaranteed return, it's far short of 8.25%.

Here's a graph of the return on the $800 payments by the number of years until the extra "income" is realized as a lump sum as in selling the house:

**Tldr;** the return on extra principle payments is inversely related to the length of time that you will carry the mortgage. We cannot calculated the return on mrgrump's extra payments unless we know how long he plans to carry the mortgage.