Is it better to use 1/3 of savings to pay mortgage to remove PMI or just keep savings for emergency?
It is better for you to use the 1/3 savings to pay mortgage to remove PMI as compared to saving for emergency. This is because if you use the payment schedule you were given, then your mortgage insurance will eventually go away. This will lead to the automatic termination, which is at the 78 percent threshold. Go to http://www.bankrate.com/finance/mortgages/how-to-get-rid-of-mortgage-insurance.aspx for more.
Its always better to keep savings for emergency.