Does Velocity Banking work????
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!
Nick
Originally posted by @Jibu V.:Originally posted by @Jenning Y.:The basic concept of Velocity Banking is to do not let you money sitting idle in bank account and earn nothing. For example, if you get your salary on the 15th of the month and pay your mortgage on the first day of next month, there are 15 days that the money earns no interest. With Velocity Banking, we first borrow the money from the HELOC and pay the mortgage one month earlier, thus save one month's mortgage payment, but we need to pay interest for the HELOC, in the above example, 15 days interest. So we trade one month's mortgage interest for less than one month HELOC's interest.
In practice, most people using Velocity Banking are paying more and earlier for the mortgage payment. Let’s separate the issues here. We are not here to talk about whether paying off loan earlier good or bad. If we want to pay off our loan earlier, we can achieve that even without using Velocity Banking.
So let’s discuss if we do not pay more each month, whether the Velocity Banking still worth it. For example, a mortgage’s monthly payment is $1000, with 3% interest. Each month we can ONLY get $1000 at the 15th of each month for the mortgage, NO MORE, and NO LESS. Then let's see whether it is worth it. If you know the concept of Velocity Banking, you'll know that the effect of the Velocity Banking is equivalent to pay one-time, one month's payment as capital payment earlier. In the above example, it means you pay $1000 capital off earlier. That will save you $30 interest per year with 3% interest. However, you need to pay the interest for the HELOC, in the above example, since we receive the money in 15th of the month that means we need to pay 15 days’ interest for HELOC each month. If the HELOC’s interest is the same as mortgage rate as 3%, the HELOC’s interest will be $15 per year, so we saved $30 - $15 = $15 per year.
Of course, how much can we actually save depends on HELOC's interest, and which day we can receive our mortgage payment (in the above example we assume we can receive it in the 15 days of each month). We may even have loss if HELOC's interest is too high and the days we receive the mortgage payment are too late (at the end of each month). But the maximum we can save is $30 per year. So does it really worth it to save at maximum $30 per year with so much hustle. At least NOT to me!
Deep down, I thought (was hoping?) you were actually about to explain the magic behind it. I guess this only further confirms the opposing view.
Numbers speak. haha!
@Tony Kim Good to know. I guess if there are large amount of money that may save a lot.
Dead horse.... whack whack...
@NIcholas Hamel if you have cash flow it works but you need monthly cash flow.
I read about this strategy in this book..Own Your Home Years Sooner! Without making extra interest payments by Harj Gill
He explains why it saves more money and is different than just making extra payments. I will say I haven't quite finished the book as we don't yet have a mortgage, so I put it down when I discovered Bigger Pockets and switched to books that will help me where I'm at now haha.
@Joe Splitrock you give good advice here. I've actually listened. I was in a 30-year at 4.375% with an initial balance at 580k in 2016. In 2017, I switched to a 1st lien HELOC pegged to Prime and as of today, I'm sitting at $475k. It would even be lower if not for a $40k master bathroom remodel, but that's another story.
I just locked in a 15-year at 2.5%. My amortized interest payment is going to be at least $400 per month lower than what I'm paying on the HELOC. It would be stupid for me not to basically insure my loan balance. I'm now locked in at a historically low rate and am saving interest even now. I'll either put that $400 in cash or invest. Either way, I'm not giving to a bank. I see storm clouds on the horizon from the Fed and I cannot see how these rates can stay this low in the long term. Even if they do, I'm still coming out ahead with security.
While there are some positive aspects to having a 1st lien HELOC, you are correct about the 15-year and taking advantage of where we are. I hope more listen to you.
Originally posted by @NIcholas Hamel:@Ellis San Jose
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 was just curious where you landed on this. This strategy is so maligned and misunderstood it's unbelievable. LOL I do it and I've been able to put about $60K extra to my mortgage in just under 3 years. Critics must think I've just skipped that many lattes, but that's absurd. Here's why and how it works. When you're paying down the mortgage on your normal schedule, the interest comes to around $20K to pay down the first $10K on your balance. It takes roughly 2 years. Everyone always says it's "cheap money", but your ACTUAL INTEREST COST is about 200% early on in your mortgage. It costs you $20K to pay off $10K. That's all based on the average mortgage. Anyway, if you move that $10K over to your HELOC it costs about $1K in interest and takes 6-10 months to pay down. You're saving time and money, because you're paying it down in a more efficient way. People say that you can do the same "just paying extra principal", but this ignores the fact that most people don't have a ton of extra money lying around. This strategy is specifically a way to pay extra principal even if you don't have the money lying around. That's the whole point.
What's crazy to me is that people will admit that paying additional principal saves you on interest, but then they'll say that if they have extra money lying around they'd rather buy stocks or a rental. Great - ***IF*** you have extra money lying around that you're not paying bills with. Then I ask them if they have money sitting in their checking account and it's crickets. All you're doing with this strategy is using money that was sitting around in your checking account to bring your mortgage interest costs down. If nothing else, you can imagine that if your mortgage functioned like a line of credit (put all your income toward it, but still be able to pay your bills) then it would be more efficient than what you're doing now. Moving a small portion of your fixed 30 year to a HELOC accomplishes the same thing. It's that simple. People are so brainwashed and won't accept anything they weren't taught decades ago, that's the bottom line. It's pathetic. If you want to see my amo table and most recent statement (proof that I'm $60K ahead of schedule) let me know, I just don't think I have them right here on my phone. Good luck!
Originally posted by @Joshua S.:Originally posted by @NIcholas Hamel:@Ellis San Jose
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 was just curious where you landed on this. This strategy is so maligned and misunderstood it's unbelievable. LOL I do it and I've been able to put about $60K extra to my mortgage in just under 3 years. Critics must think I've just skipped that many lattes, but that's absurd. Here's why and how it works. When you're paying down the mortgage on your normal schedule, the interest comes to around $20K to pay down the first $10K on your balance. It takes roughly 2 years. Everyone always says it's "cheap money", but your ACTUAL INTEREST COST is about 200% early on in your mortgage. It costs you $20K to pay off $10K. That's all based on the average mortgage. Anyway, if you move that $10K over to your HELOC it costs about $1K in interest and takes 6-10 months to pay down. You're saving time and money, because you're paying it down in a more efficient way. People say that you can do the same "just paying extra principal", but this ignores the fact that most people don't have a ton of extra money lying around. This strategy is specifically a way to pay extra principal even if you don't have the money lying around. That's the whole point.
What's crazy to me is that people will admit that paying additional principal saves you on interest, but then they'll say that if they have extra money lying around they'd rather buy stocks or a rental. Great - ***IF*** you have extra money lying around that you're not paying bills with. Then I ask them if they have money sitting in their checking account and it's crickets. All you're doing with this strategy is using money that was sitting around in your checking account to bring your mortgage interest costs down. If nothing else, you can imagine that if your mortgage functioned like a line of credit (put all your income toward it, but still be able to pay your bills) then it would be more efficient than what you're doing now. Moving a small portion of your fixed 30 year to a HELOC accomplishes the same thing. It's that simple. People are so brainwashed and won't accept anything they weren't taught decades ago, that's the bottom line. It's pathetic. If you want to see my amo table and most recent statement (proof that I'm $60K ahead of schedule) let me know, I just don't think I have them right here on my phone. Good luck!
HELOC vs a 30-year mortgage, you are absolutely correct. I'll never have another 30-year mortgage. The 15 is a different story. Using all of the HELOC calculators, I'm going to save around 15k in interest going to a 15-year fixed vs staying with my HELOC at prime.
I've gotten much farther ahead by going to a HELOC vs staying with my 30. It helped my LTV significantly to get better terms on my 15.
I employed this strategy as a Private Client Banker in Florida with clients that were more susceptible to law suits back in the day. Florida doesn't have a cap on the equity that you have in your home with respect to asset protection, so putting money into your homestead makes sense for those people to protect their money from creditors. That being said, Equity Lines are usually based on the Wall Street Journal Prime Rate, currently at 8.25%. Many people have rates that they got back in 2020 and 2021 that are sub 5%. In that case, does it really make sense to replace a 4% rate for one hovering around 9%? Probably not. It's a math problem. The concept is sound and we use our larger equity line to help fund projects, but we don't touch our sub-4% first. If you have a low rate on the first mortgage and you can either eliminate higher rate debt of outpace that rate with the returns you're getting from your real estate investment activities, then Velocity Banking might not make sense. Good luck to you.
Old post but it does work. I've run my numbers many times in different ways and it works. The key is I didn't change anything different with my spending habits. No extra payments. Just money money around to work in my favor.
It's all about how the interest is calculated. Because Loans are amortized the interest is front loaded to the first half of the life of the loan. So you save tens of thousands in interest by putting $30 to $50k from a line of credit all at once to a loan and then you pay down the line of credit in less than a year with your cash flow. For $50k you would need a cash flow of about $4k per month. My goal is to pay off the Line of Credit in less than a year each time. So if you only have $1k in cash flow you would only need to use $12k.
Run your Loans and Line of Credit through a calculator like calculator.net. It allows you to see how much interest you save by adding a lump sum to your loan. You pay a few thousand in interest on the Line of Credit over a year and save tens of thousands in interest with just one payment. I'll take that any day. Rinse and repeat.
I just started using this method this month.