Being the frugal fella you are, you have spare cash each month and you need to decide what to do with it. You probably have several options: pay down the mortgage, pay down student loans, invest in a retirement account, pay off credit card debt (credit card debt? but you’re a frugal fella, right?), or put it under a mattress. Whether you’re earning interest or paying interest, these can still be compared to find the most qualified suitor for your cash. Let’s take a look at some numbers, however accurate they may be, for each of these sinkholes:

• Pay down the mortgage: 5% (mortgage interest rate)
• Pay down student loans: 4% (student loan interest rate)
• Invest in a retirement account: 9% (rate of return)
• Pay off credit card debt: 12% (credit card interest rate)
• Put it under a mattress: 0% (rate of return)

Now, if you subscribe to the idea that you should put your extra cash in the one with the highest rate, this would lead you to believe you should pay down the credit card. Most people would stop there.

But let’s look at PMI. First things first: lenders are required by law to remove PMI once the balance of the mortgage reaches 78% of the original value of the property (given your payments are current). Technically they are able to remove PMI prior to 78% but that’s another story and we’ll play conservatively. Let’s say we purchased our home for $200,000 and so far we’ve paid the mortgage down to $165,000. 78% of $200,000 is $156,000 so we’re $9,000 from being free of PMI. We pay $100/month for PMI and our mortgage interest rate is 5%.

We may or may not have a full $9,000 to pay down our mortgage but, regardless, assuming so will more easily allow us to determine if this is where we should sink our cash. If we had the full $9,000, what would be the cost of putting it under our mattress versus paying down the mortgage? 5% of $9,000 is $450. This is the amount of annual interest we would save if we paid down the mortgage. Another way to look at it: this is the amount we would pay on annual mortgage interest if we stashed the $9,000 under our mattress instead. Now add PMI. PMI in our example is $100/month so over a year this tallies up to $1,200! Now let’s add the interest and the PMI together and we arrive at $1,650. This is the true opportunity cost/gain for the $9,000 with regard to the mortgage.

Now let’s calculate our opportunity cost/gain in the form of a percentage so we can compare it with our other candidates. $1,650 / $9,000 = 18.3%! The option of paying down the mortgage just went from 5% to 18% which is even higher than the massive credit card interest rate of 12%! Run the numbers for your own situation and see what you come up with.

Not So Fast

Before sinking all your extra funds into your mortgage to remove PMI, consider the following:

Pay-off cliff. PMI is somewhat of a different beast from interest. If we paid $1000 on our example mortgage we would immediately save ourselves from paying $50 each year on interest. On the other hand, the $1000 wouldn’t save us from paying the same amount in PMI until we paid all $9,000 that’s needed to get to the 78% PMI removal “cliff”. This causes some interesting effects. For example, the farther you are from the pay-off cliff the lower your opportunity cost/gain will appear for paying down the mortgage. Keep this in mind when paying down the mortgage as paying down $8,999 in our example is going to do you much less good than $9,000. Don’t run and pass out right before you reach the cliff.

Tax deductions. At least through 2011, mortgage interest and private mortgage insurance (PMI) is tax deductible though starts to phase out once your gross income reaches $100,000. Roughly, this means if your tax bracket is 25% then your opportunity cost/gain for the mortgage interest and PMI should be reduced by 25%. In our case, the 18.3% would more accurately be reflected as 13.75%.

Mind over math. Not all people feel you should pay down debts with the highest interest first. Dave Ramsey and other smart people like him believe that paying down debt is as much of an emotional game as it is mathematical. To get the emotional drive from quick, up-front wins, Dave recommends paying down debts with the lowest balance first–not necessary the highest interest.

Liquidity. Home equity is not a very liquid asset. In other words, if you lose your job and your kids are going to starve, it’s difficult to sell the house to feed their faces. Liquidity is itself of value and may be a great reason to store some savings elsewhere.

Vet your options. I’ve kept things pretty simple but life is good at throwing curve-balls. Make sure you understand the benefits of putting your money in each of your options. If your employer is offering a 401(k) match, that’s likely a 50% to 100% immediate return (keep vesting in mind) that should not be turned down. Likewise, there are tax advantages and implications all over the place. Be smart. My main goal of this article is to keep you from sweeping PMI under the rug and instead mathematically incorporating it into your financial decisions.

Having read about many difficulties opening Zecco accounts, I made sure I gave myself plenty of time to open my Roth IRA account at Zecco in order to fund it for the 2007 tax year by April 15. Here’s my journey of running the Zecco Gauntlet.

January 5
I filled out the online forms at Zecco.com to start (and was hoping to end) the application process. It was simple enough. Quite straightforward and nothing really to complain about. At the time, I didn’t notice a way to print off my completed form nor did I think much about it. I should’ve known better. I immediately received an email that said:

Welcome to Zecco Trading! We’re processing your application. Look for an email with your account informatino or a request for more information shortly.

IMPORTANT NOTE FOR ALL IRA APPLICANTS AND APPLICANTS WITHOUT US SSN:

We need signed application documents to approve and open your account:

1. MAIL ALL OF YOUR ORIGINAL SIGNED NEW ACCOUNT DOCUMENTS AND SIGNED SIGNATURE PAGE along with a photocopy of your Government issued photo I.D. to our offices at the address below:

Zecco Trading
P.O. Box 4328
Ontario, CA 91761

At this point, I didn’t have any application documents or a “signed signature page” and frankly didn’t know what they really were. Again, I hadn’t seen anywhere to print them off at the end of the application process and there were no links to go back and print them off from the Zecco website.

At the time, I was pretty busy with school and just hoped I would receive another email with my account documents or that I wouldn’t need them. I had read other blog posts stating that in their sign-up experience they didn’t need to mail anything in; however, they were probably referring to a regular trading account and not an IRA account.

January 15
I hadn’t received any other communication from Zecco so I thought I would inquire about my account status. I sent an email to the customer service address listed on the website. Here’s my email:

Hey there,

I signed up for an IRA account more than a week ago and haven’t heard anything back. Can you give me an update please? What kind of information do you need to check on that? My name is Aaron Hardy and my username is [username]. Thanks!

Aaron Hardy

January 16
I received the following email back from customer service:

Dear Aaron,

Thank you for contacting Zecco Trading. After researching your
account information it appears we will need a signed customer agreement
application, Roth IRA simplifier, and a copy of your ID.

We hope this information has been helpful. If you have any additional
questions please contact us. We are here to help. We hope you have a
great day.

Best Regards,

Heather

I didn’t have a customer agreement application and I didn’t know what a Roth IRA Simplifier was so I immediately emailed them back requesting the customer agreement application and a Roth IRA Simplifier.

January 17
I received the following email from customer service:

Dear Valued Customer,

Thank you for contacting Zecco trading. We require all paperwork be
received prior to activating IRA accounts. If you did not save your
application to your hard drive, there will be no way to retrieve it. We
will have to send you a copy via mail per your request. You should have
completed an IRA Roth simplifier with you online application, I have
attached this form to this email.

I hope his has been helpful; we look forward to your business.

Sincerely,

Zecco Team Member

Meredith

January 20
I responded with the following:

Yes, please send me a copy of my application through the mail. Thank you. My address is as follows:

Aaron Hardy
[my address]

January 22
I received the following email from customer service:

Dear Aaron,

Thank you for contacting Zecco Trading. We will be more than happy to
mail you a copy of your application. However, we still need your
reference number to access your account.

Hope this has been helpful. Should you have any further questions or
concerns, please feel free to contact us again.

Thank you for your interest in Zecco Trading.

Sincerely,

An T.

From what I knew, I didn’t have a reference number. I responded with the following:

I don’t have any reference number. What now?

Aaron

January 23
I received the following from customer service:

Aaron,

Thank you for contacting Zecco Trading. Your reference number
is at the top right hand corner of your customer agreement application.

We hope this information has been helpful. If you have any additional
questions please contact us. We are here to help. We hope you have a
great day.

Best Regards,

Heather

What!? Isn’t the customer agreement application what I’m requesting in the first place? How can I get my reference number from my application so they can send me my application?

I responded with the following:

I don’t have a customer agreement application. I did everything online and didn’t print anything off. What now?

Aaron