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How do I calculate which of these is more advantageous to do with a windfall?:

  • pay down my mortgage to the point where PMI will be removed
  • pay off a higher interest loan

Assume the amount required for each is the same.

I've been told that it's better to pay down the higher interest. I'd like to understand the math behind it.

4

Calculate how much you will end up paying total in each case, and compare. The "end" here is when you have both paid off the high-interest debt and payed down the mortgage to PMI removal.

The numbers you want to look for are:
- how much did you pay in interest on the loans by the time they were paid off?
- how much did you pay for PMI by the time it was removed?
- how much interest did you pay on your mortgage by the time PMI was removed and the loans were paid off?
- how much do you still owe on your mortgage once PMI is removed and the loans are paid off?

You can work out these numbers assuming no windfall to get a baseline of what you'd be paying anyway. Then re-asses with the windfall applied to either the loans, the mortgage, or split between both. Whichever approach minimizes money lost to interest and PMI payments is likely your best option.

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