Hey everyone ive been hearing about and researching VELOCITY BANKING alot lately. Seems too good to be true. Any of you experts have experience in this field and can confirm or deny? Thanks everyone!
Paying off a low interest mortgage instead of acquiring profitable assets is counter intuitive to creating wealth. It's a distraction, it's just creating a fancy name "Velocity Banking" and treating it like a magic wand without testing the financial math behind the whole philosophy. It's a gimmick
Yes, it works......but simply paying extra toward your mtg out of your pocket does also...which is what you’re doing with a heloc. There is nothing magic about it.
Yes its instead of having a cash balance in checking youre constantly pushing it to the loan then moving around between the debt. Cash in savings would be dead weight because its not actively paid against 1 of the loans.
@Blake Garcia. I have a HELOC for 75k. I'm thinking about doing it. Can u get a debit card to use for all your everyday expenses do I have to use the checks only to access the money?
All the youtubers sound like they do it directly. I have never had 1 that accessible. I figured id have to keep a grand or a week of expenses in checking or just use credit card and pay the balance monthly when its due before any interest accrues.
@NIcholas Hamel An amortized mtg IS still simple interest, just like a heloc.....the interest due that particular month is simply your balance times the annual interest rate, divided by 12. There is absolutely No difference in the interest charged.
The Only reason either method pays your mtg down faster is because you are making Extra payments toward the mtg.....with the heloc you are just borrowing that money and have to pay it back, with interest.
@NIcholas Hamel Not true at all. You borrow money from the heloc to pay down a chunk of your mtg, say $10-20k (moving the debt)....then you have to pay off the money from the heloc you borrowed.
There is absolutely NO savings in using the heloc method (which you have to pay back out of your pocket anyway) verses making the extra payment out of your pocket directly to the mtg. The only advantage is that you have a heloc in case you need money for an emergency.
As I said...there is No manic to the heloc/velocity method.
Paying off a low interest mortgage instead of acquiring profitable assets is counter intuitive to creating wealth. It's a distraction, it's just creating a fancy name "Velocity Banking" and treating it like a magic wand without testing the financial math behind the whole philosophy. It's a gimmick
I completely agree with you Ellis when you say i should be buying assets instead. Im having a hard time getting my fiancé onboard. I convinced her to read rich dad poor dad and about ten pages in my dog literally ate the book lol. If she was completely Onboard i wouldnt even consider the idea of this velocity banking idea
I've run the math in a variety of scenarios and interest rates. VB will pay down debt faster in a few scenarios:
1. If the interest on the heloc is within 1-2 points of the mortgage
2. you are less than 10yrs into the amortization schedule
3. you use the heloc as your emergency fund and start paying down debt immediately vs building a reserve as dead cash first for 6mo.
ive found the extra savings to be a few thousand to over 15k depending on the mortgage size and 3 to 5yr period. whether that is compelling enough vs snowball is personal preference.
I've run the math in a variety of scenarios and interest rates. VB will pay down debt faster in a few scenarios:
1. If the interest on the heloc is within 1-2 points of the mortgage
2. you are less than 10yrs into the amortization schedule
3. you use the heloc as your emergency fund and start paying down debt immediately vs building a reserve as dead cash first for 6mo.
ive found the extra savings to be a few thousand to over 15k depending on the mortgage size and 3 to 5yr period. whether that is compelling enough vs snowball is personal preference.
Quick question, If a mortgage interest rate is 5% annually , What is the investors annual rate of return when they pay down the principal early?
@NIcholas Hamel, if it's a 30 year mortgage loan, and the only method they are using is "velocity banking", then they are not. Here is a simple example that illustrates it. If you take out a 100k loan at 5% for 30 years your principal and interest payments are $536.82 per month (for 360 months). If 100% of that payment went to principal every month it would take 186.3 months to pay off the loan. That's 15.5 years. So if it takes 15.5 years to pay off a loan, paying no interest at all, how can it be paid off in 10 or so years when you factor in the interest if you don't make extra payments towards the principal? Mathematically impossible.
If there are no savings how are people paying off their mortgage in 5-10 years?
Because.....you are paying Extra into your mtg with borrowed money from your heloc, then you have to pay the heloc back. As I said, no better than just making extra payments toward your mtg.
This is just a gimmick and does not work. I promise you I have ran many calculations. In all the videos you watch they are just making more payments. You can make xtra pmts on a mortgage as well.
@Ellis San Jose, dismal. depending on where one is in their FI journey, rate of return may not yet be the focus, or perhaps they are past the accumulation phase, or even on the far end of the conservative spectrum and prefer cashflow to roi with no debt as build a portfolio.
I'm not in favor of paying down good debt prematurely, but believe there are better methods than snowball for getting rid of bad debt like a primary.
@Marco Anemone, this isn't a question of minimum payments, but applying extra available cashflow every month to pay a debt early. your assumption does not take this into account.