I can only tell you what I would do in your place....
I would take the $29k if I had it available and put it on the mortgage, then PMI would be gone forever.
That way at least $1500 would be saved over the next 7 months not to mention the interest reduction that one time pmt of $29k would get me over the life of the mortgage. (I would run those numbers on the interest savings and that might convince you its the right thing in the long run)
In the end I would owe just under $200k on a townhome that should appraise at $300 in the near future....Not bad at all
Thats 100k of equity there for the taking if I ever need it...No PMI to worry about.
The real question is if you owed $198k today on your house would you take out $29k to put into a ING account? I sure would not, especially if it was going to cost me an extra $173.00 a month down the drain. By not paying down (up?) to the 20% level that is in effect what you are doing.
Honestly, it does not seem that confusing to me at all, but then again its not my Money.
Good Luck!