Wow, thanks for the thoughtful answers! The consensus seems to be we should keep the rental.
I was probably too brief in my OP - especially as I did leave out the reasons we are looking to buy our new house soon. We are currently living in a very small cabin I jointly own with my siblings - need to get out of here! We also want to relocate to the Western Slope as our permanent/long-term home. We have two girls just beginning elem. school and want to get them "rooted", as we've moved twice in the last few years. So, we would like to buy/move sometime in the June/July timeframe - August at the latest.
I was originally almost certain I wanted to sell the rental house, but now am almost as certain I want to do the opposite. I did talk to a financial planner (through USAA), who started out encouraging us to hold onto the rental, but ended up saying either choice was a reasonable one. He was not a "mortgage guy", so he couldn't/didn't answer the distinction between 1 and 2 in my original post.
So, it sounds like if we can swing the deal on the new house without selling the rental, we should do that, even if we have to pay PMI. I really HATE being in debt, and would like to pay off the student loans ASAP, but I guess I can suck it up and pay that high-interest debt for a few years if it works out better in the long run.
Again, thanks for the responses, and let me know if the additional data makes any difference in your opinions.
this is a good question for your accountant or financial planner. Good answers and thoughts below. I like the fact that you are close to having all of your best options available when your wife starts to work in the fall. You may be better off to wait until then to purchase the new home. That way you will not be stretched on your qualification and monthly budget. Then you can more easily keep your profitable rental and the equity in that home. That sounds like a good option. It would be interesting to get you financial planner's take on this. Best of all, you have several 'good' options. take you time to make sure you take the best option for you current and future benefit. Good success to you.
Robert McGuire ASR
Your Castle Real Estate
Direct - 303-669-1246
My husband finished school with $100K in debt. Good profession - we paid that off. You are used to living on your salary alone. Keep your lifestyle until you have a good nest egg to do as you please!
Once your wife gets her position, you can start paying down her student loans, and once that's paid off, maybe you can pull some money off your rental to purchase other rental homes, which you can also afford the payment for, since you no longer have the student loans to pay off.
Just my 2 cents. Best of luck to you!