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From what I have come to understand 20% is the amount you ideally pay down on a house primarily because personal mortgage insurance isn't required.

One risk I would like to hedge if I buy a house is the possibility of losing my job or circumstances changing.

I realize ideally this would be accounted for as part of an emergency fund.

Here's another scenario:

  • I save 20%.
  • I take out a years worth of payments let's say on the order of $20,000 and what's left is my initial down payment ($40,000 on $300,000).
  • I then forward pay a years worth of payments off of the front of the loan.
  • I continue to pay payments as usual with a year of buffer.
  • PMI is no longer required since I have already met 20%

Since no interest or very little interest has acquired when those first payments are applied it should be almost the same as if I paid it off of the principal (slightly higher monthly payment). In conclusion, I'm trading a slightly higher monthly payment to have a years worth of buffer for my payments.

Is my understanding of this correct? Would this be ill-advised for any reason?

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    Who told you you can prepay for a year? My mortgage for example cannot be prepaid for more than two months ahead, anything else will be applied to principal. – littleadv May 11 '14 at 19:02
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    What country are you in, as the rules may be different in different countries. Also if you borrow 80% or less PMI is still paid but by the lender, they pass it on to borrower when risk becomes too high at over 80%. – Victor May 11 '14 at 20:12
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    @littleadv "principal" ... My pet peeve & I can't edit your comment :/ – Chris W. Rea May 11 '14 at 20:46
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    @ChrisW.Rea - Mine too, but I am blessed with the powers to fix such peeves. Edited. – JTP - Apologise to Monica May 11 '14 at 21:28
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In the prior PMI discussions here, it's been stated that the bank is not obligated to remove PMI until the mortgage's natural amortization puts the debt at 78% LTV. So, paying in advance like this will not automatically remove the PMI.

Nor will a lump sum payment be certain to move the next payment ahead a year. If it's entered as a principal prepayment, the next month's payment is still due. In the world of coupon books, if you sent in a year's payments, you'd not benefit from the interest saved, in one year you'd owe what the amortization table tells you.

There's no free lunch when it comes to mortgages or finance in general. This is why we usually caution that one should not be cash poor the day after buying a house. Best to save 30%, put down 20%, and have a cushion after the closing.

  • This isn't the case in Australia with variable loans, you can make prepayments as much as you want then have it available for redraw as well. – Victor May 11 '14 at 20:15
  • @Victor - Good point. I looked at OP's public profile. He is in US. – JTP - Apologise to Monica May 11 '14 at 21:32
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    I totally went cash poor when we closed on our house. We then had to pay a $6,000 plumbing bill 3 months later. Experience is a WONDERFUL teacher – Noah May 12 '14 at 18:33

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