re: What to do with 1 year increased pay?

A few of things…

I assumed (maybe incorrectly) that you had a conventional loan. If you don’t have a conventional loan, then you are stuck with PMI unless you refinance. If you have a conventional loan, you can get rid of PMI through two ways:

1. As you stated, pay for an appraisal and loan needs to be 80% of value of home. This may be worth if if you feel the property has appreciated significantly since you bought it.

2. Paying down your mortgage to 78% of the original sales price. PMI automatically goes away when you reach this milestone. No appraisal needed.

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My struggle is that it feels like I'm tying up $31.5k in exchange for $1900 per year. Yea I guess that's a 6% return, but my 401k has been outperforming that

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Keep in mind the added benefit of paying down your 3.25% mortgage which gives you a total ~ 9.25% return. That’s how I view it.

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and I believe you get a tax deduction for PMI?

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It’s deductible if you itemize but not if you take the standard deduction which applies to the overwhelming majority of the population and likely to you.

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Is it really best to tie up all that money? That could be used for a down payment on a rental property if I chose to get off my arse and jump into that world

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Ultimately your call… you are correct, a lot of things you can do with this cash. For someone single and 31 I feel like that’s a lot of cash on hand. Personally, I’m also not really a big on emergency funds unless you don’t have any assets. That doesn’t apply to you. You could tap brokerage and Roth IRA for emergencies if needed.. plus the $20k cash you’d still have after paying down mortgage.