Does Velocity Banking work????
Member since 2019 · 187 posts · 74 votes
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
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
oops, sorry marco. tagged wrong person. your statement is 100% correct
@Bryan Lyde, I was responding to the question..
Originally posted by @NIcholas Hamel:
@Wayne Brooks
If there are no savings how are people paying off their mortgage in 5-10 years?
And simply illustrating that it cannot be paid off that quickly without extra payments towards principal.
From what I understand with the VB strategy is that by paying down more PRINCIPAL, you reduce the INTEREST for the rest of the mortgage. As an incentive for the banks to lend money for 30 years, they are allowed to amortize mortgages so that you pay more INTEREST (for example 90 percent of payment) and less PRINCIPAL (for example 10 percent of payment) at the beginning of the mortgage. So, by reducing your PRINCIPAL via a HELOC or your own funds, you will substantially reduce the overall interest you pay across the mortgage. Your agreed payment amount will never be reduced unless the bank re-amortizes your loan which is rare. Due to this, your mortgage length (TIME) will be reduced. That's what I understand from the strategies. And yes, I would run on calculators to see if it is beneficial for you. For example, if you are at a point in your mortgage where you are already paying significantly more in PRINCIPAL (towards the end), then it may be less beneficial. However, as an investor, I would utilize the equity in a property to purchase more investments.
@NIcholas Hamel
Remember most helocs can be called by the bank at any time. Just keep in mind
That is true Victor Vella. That is the downfall.
https://www.youtube.com/channe... . This channel may help you with some examples. Cashflow is king with this form of banking. Throw all your income to the Heloc or Loc. Pay your expenses out of the line. Leave the cashflow in pay down the line make a big chunk on your debts. Rinse and repeat. I paid off 58k student loan in 18 months using this technique and many other debts. Good luck.
@NIcholas Hamel
They are probably the same people that don’t invest in real estate because they are making huge returns in the stock market.
They are full of bs. Math is math.
There is no such thing as a free lunch. That’s simple simple economics.
Oh yea. And I might as well add this..... there is profit in all labor.
@Bryan Lyde
Yes if if if if if if. Yea right. What about the fees for getting the heloc. What about annual fees for renewal? Never play another mans game. I mean you could always just spend 100$ a week on lottery tickets and when you win you could pay off the debt.
@NIcholas Hamel
If you take out a HELOC for 40k and pay that 40k toward your loan amount, you fast forward in time to whatever period gets you to a 40k PRINCIPLE reduction. As long as your HELOC monthly interest is less than your monthly interest for your mortgage loan, you are saving money. You skipped all of the interest you would have paid, and instead will be paying lower interest to pay back your HELOC (this still requires additional income to pay off, on top of your fixed monthly payment). Getting further along on the amortization schedule, you immediately start paying more each month toward principle than you were before you paid down the 40k.
Many HELOCs have really low introductory rates, but if you don’t pay it off before that period is over (maybe 1, 2 or 3 years) it may go up to market interest rates, which can be higher than what your mortgage loan interest. Some people will move the loan over to another bank and get another introductory period.
I LOVE HELOCS as a loan strategy if you don't have the cash to put 20% down and want to avoid PMI and higher interest rates, because you may be able to put 10% down and then simultaneously take out a HELOC for that 10% (instead of a second mortgage, since the introductory rates are much lower), so your first mortgage is only 80%. You will still need to have a financial plan to pay off that HELOC.
To pay less interest on the HELOC balance, you can use your HELOC like a bank account.
Discuss your specific situation with a financial advisor / loan officer.
Hope this helps!
@Victor Vella
Thanks victor. You mean they can force you to pay the entire balance at anytime? Does that happen often?
@Jenna Forti
Well said. Thanks jenna!
Often? No.
Banks could restrict draws and convert it to a fixed line of credit, most would probably go that route.
Could it be asked to repaid in full in 30, 60 days....read the contract of the line your looking at.
It’s not a matter of how often it’s a matter of how does that affect you if they did.
Full disclosure I’m not a financial advisors, agent - just a full time investor.
I use lines of credit but do not overleverage my self to them and basically use it to bridge deals.
@Victor Vella
Interesting. Thanks Victor. That def helps
@Laura George in my experience there were no fees, no annual anything. smart shopping a lender can avoid that.
If you believe the general principle that you can use a dollar more than once, and leverage equity smartly, then heloc is a great way to reach goals faster.
If not, the are many other ways which are also acceptable.
It sounds like you have had a bad experience with heloc. please share so others can learn.
I could maybe see using something like this to pay down a loan at a higher rate than the Heloc, but don't get all the effort to accelerate a fixed residential loan at what, 4%?
How about commercial loans with calls and adjustable rates? Seller financed rent houses at 6% or more? Any other installment or revolving debt with higher risk and utilization rates?
If you really have no other debt to attack than your primary I guess all this could be worth it. There are worse things to do than being mindful and intentional about reducing debt. Carry on.
@NIcholas Hamel
If you take out a HELOC for 40k and pay that 40k toward your loan amount, you fast forward in time to whatever period gets you to a 40k PRINCIPLE reduction. As long as your HELOC monthly interest is less than your monthly interest for your mortgage loan, you are saving money. You skipped all of the interest you would have paid, and instead will be paying lower interest to pay back your HELOC (this still requires additional income to pay off, on top of your fixed monthly payment). Getting further along on the amortization schedule, you immediately start paying more each month toward principle than you were before you paid down the 40k.
helocs, by definition, are riskier than 1st mortgage positions, so those intro rates only last 6 months or so and revert back to whatever the current ongoing rates are. just looked at my heloc rate, and it's at 3.75% vs low 2s you can currently get on a 30-yr.
here's a no bs working file that @Daniel Weed had created that you can fill out and see for yourself what, if any, velocity you're going to get: https://www.biggerpockets.com/files/user/DanWeed/file/loc-vs-mortgage
The only reason this works is because you're almost forced to pay off your HELOC as quick as possible to keep out of a fiscal hole. It's pretty obvious that the math is about the same (or slightly worse) as just paying down the mortgage directly. This is similar to the whole infinite banking idea. Not very smart from a numbers perspective, but potentially valuable for people who find it easier to follow through on things that they're locked into.
@Ellis San Jose paying off debt isn't counter intuitive to creating wealth. I know several people who are VERY wealthy and debt free. Net worth = Assets - Liabilities. The goal is to increase the first and/or decrease the second.
And yes, you can argue that paying down debt might not build wealth as fast than buying risk assets. But that doesn't mean it's counter intuitive to wealth building. In general riskier investment options, like buying assets instead of paying down debt, will offer higher potential returns over time. That doesn't mean we all go out and load up on leverage to buy the riskiest possible investments because doing otherwise would be counter intuitive to creating wealth. There is a place for all levels of risk activity in well constructed portfolios.
@NIcholas Hamel
If you take out a HELOC for 40k and pay that 40k toward your loan amount, you fast forward in time to whatever period gets you to a 40k PRINCIPLE reduction. As long as your HELOC monthly interest is less than your monthly interest for your mortgage loan, you are saving money. You skipped all of the interest you would have paid, and instead will be paying lower interest to pay back your HELOC (this still requires additional income to pay off, on top of your fixed monthly payment). Getting further along on the amortization schedule, you immediately start paying more each month toward principle than you were before you paid down the 40k.
Many HELOCs have really low introductory rates, but if you don’t pay it off before that period is over (maybe 1, 2 or 3 years) it may go up to market interest rates, which can be higher than what your mortgage loan interest. Some people will move the loan over to another bank and get another introductory period.
I LOVE HELOCS as a loan strategy if you don't have the cash to put 20% down and want to avoid PMI and higher interest rates, because you may be able to put 10% down and then simultaneously take out a HELOC for that 10% (instead of a second mortgage, since the introductory rates are much lower), so your first mortgage is only 80%. You will still need to have a financial plan to pay off that HELOC.
To pay less interest on the HELOC balance, you can use your HELOC like a bank account.
Discuss your specific situation with a financial advisor / loan officer.
Hope this helps!
You do not skip interest or mortgage payments. This is the lie that many Youtube guru use to trick people. They claim, you jump to a different point in the amortization schedule. They add up all the "skipped" interest and claim you save all that money. That is mathematically incorrect. It is just not how interest works. You only skip a portion of that interest equal to interest accrued on the pay down amount. But you don't actually skip it, you transfer it to a different loan.
For example lets say you transfer $40K from a mortgage that is at 4% to a HELOC at 3%. Over the course of one year, here is what the interest looks like:
$40,000 @ 1 year @ 4% = $1600
$40,000 @ 1 year @ 3% = $1200
Over the course of one year, you will save $400 in interest. If the HELOC interest is the same rate, you save nothing. If the HELOC is a higher rate, you pay more interest.
When you pay down principal on a fixed term mortgage, the payment stays the same, but more money goes to principal and less to interest. That is because interest is based on outstanding principal balance. The only way to pay a mortgage off faster is to make higher principal payments. You can do that with or without a HELOC. A HELOC is simply transferring debt from one loan to another. The "magic" of a HELOC is that it forces you to make extra principal payments. Obviously that is not magic, because you can do that with or without a HELOC.
@Wayne Brooks
If there are no savings how are people paying off their mortgage in 5-10 years?
They pay the loan off in 5-10 years, by paying additional money each month towards the principal. Just because someone is on Youtube, doesn't mean they know what they are doing. In fact, quite often it is the exact opposite since they are more interested in channel views so they make more money from advertisements. Therefor any "Shock" video is a goldmine for them, in this case "How to pay off a 30yr mortgage without paying any extra". I mean it suckered you into watching their video didn't it?
Lets be honest, if you could actually pay off a mortgage in 5-10 years without paying any extra money, then this wouldn't be some super duper secret that some random Youtuber discovered while making a home video in his basement, it would be common knowledge in a multi trillion dollar industry.
I've watched dozens of these videos, and each time I'm appalled by the general lack of knowledge that each poster exhibits. They claim that it pays down the mortgage faster, and they show a bunch of random math to make everything look legit, and since most viewers suck at math, and want to naturally believe whatever the guy is saying, they simply accept all of what he is saying as being factual. But in all of their random math calculations, they cleverly omit the most important item....How much TOTAL are you paying each month.
They want you to quickly repay this 10-20k heloc loan that you took out, so that as soon as you pay off the heloc, you can immediately "chunk" again and redo the heloc and eliminate an extra 20k from the mortgage balance.
The problem is that now not only are you still making your fixed monthly mortgage payment, but you are also trying to eliminate an EXTRA 20K every 6 months or so. So basically you are paying an extra 3500/month or so towards your house. It doesn't take a genius to know that if you make 3500 monthly payments ON TOP OF YOUR EXISTING MORTGAGE that your loan will get paid down very rapidly. But by disguising the math between your bank account and your heloc, it confuses the viewer and they loose track of this simple fact; they are paying significantly more towards the house each month. And in these situations, since you are carrying a balance on your heloc from month to month, and that interest rate is higher than your mortgage rate, the heloc is actually HURTING you, and slowing down your progress. But by making it so complicated, you don't even realize that it is hurting you.
While a heloc process "can" technically save a little time (1-2 years off a 30yr loan), it isn't worth the risk involved and it doesn't work the way any of these Youtubers want you to do it.
If you were to do my method (which I don't recommend) you should NEVER take out more on your heloc than you can repay each month. Trading 20k at 5% interest on your mortgage for 20k on a heloc at a higher % rate is stupid if you let that balance sit in your heloc month after month. At this point people who don't know basic math like to chime in and say silly things like, "But what about simple vs compound interest?" Do the math first, and then come back and comment.
A heloc can work in part because some people forgo an emergency fund, so instead of keeping a few grand in a savings account somewhere for a rainy day earning 0.01% interest, they can immediately put this extra money towards the principal of the mortgage, and if they get in financial trouble they can temporarily borrow against the heloc. This pays the loan down faster if everything works out perfectly. In this manner they are trading a few k earning 0.01% interest, in favor of putting that money immediately towards the principal where this money will effectively save them 5%.
In addition, lets assume if you earn 5k/month from your W2 job, then you would set up your direct deposit to pay into your heloc instead of your bank account. So the first month you would empty your bank account and spend all of your money towards the loan balance. You would then set up ALL of your bills to be due on the 28th of the month. (This is different than when you randomly decide to pay the bill) You would simply contact your credit card companies, utility companies, cell phone companies etc, and ask them to bill you on the 28th of the month instead of the 1st, or whatever random day they have your due date set at. Once all of this is done, you are putting all of your living expenses on a credit card, so from day 1-28 of the month you have no money actually leaving your accounts, only extra debt being racked up on your CC. On day 28 you take out a 5k installment on your heloc to pay all of your debts in full and you carry this 5k balance on your heloc for the next few days until day 1 of the next month when you job pays you and is direct deposited into your heloc account fully repaying the account. And now at this point you are back to square one, with no money in your bank account, and no balance on your heloc, and no bills due for another 28 days.
Lets assume that your mortgage is at 5% interest, and your heloc is at 7%. Then many people will incorrectly claim that all you're doing is trading 5k worth of debt at 5% interest, for 5k worth of debt at a HIGHER 7% interest. And that is partially true, but you are paying 5% interest on your 5k for the entire month, I'm only paying 7% interest on my 5k for 2-3 days between the 28th of one month, to the 1st of the next month.
Since the balance of the heloc is repaid in full each month, a balance only exists on the heloc for between 1-3 days, depending on what month it is. This means I'm only paying interest on 1-3 days. So if I'm only paying interest for 3 days, that means I'm effectively paying
0.07 *$5000 *3/365 = $2.87 in interest
As opposed to what you are paying in interest of .05/12 *$5000 = $20.83
This small $18 dollar per month difference that you pay in interest, is instead going towards my principal. Which over time reduces my loan amortization by a year or so.
I don't recommend this alternate method, simply because it is too complicated to set up, and too little reward for the risk. By running a negative balance each month, you are risking everything on the assumption that your bank will continue to give you that heloc money every month and they won't put a freeze on it when some global crisis ( Corona Virus??) spooks the investment world.
I mean do you really want to go through all of this effort to essentially 'gain' an extra 18 bucks per month? I sure don't. Your time and energy is better spent analyzing more deals, or simply putting in 1hr of overtime at your W2.
@Blake Garcia. Thanks blake. Im still trying to fully
Understand the difference between the two interests. Amortized and simple
There is nothing such as amortized interest. Payments are amortized, not interest. The difference between a HELOC and a fixed term mortgage is that a HELOC usually only requires you to pay interest. So the pay off term on a HELOC is based on how much principal you pay. It is a variable payment. On a fixed rate mortgage, they calculate payment based on an assumed pay off term. A 30 year loan assumes 360 payments. If you make extra principal payments, the loan will get paid off early. That is because the payment stays the same, but the amount of payment going to principal increases and interest decreases.
@Bryan Lyde, I was responding to the question..
Originally posted by @NIcholas Hamel:
@Wayne Brooks
If there are no savings how are people paying off their mortgage in 5-10 years?
And simply illustrating that it cannot be paid off that quickly without extra payments towards principal.
The only way to pay off a loan this fast is with extra principal payments.
https://www.youtube.com/channe... . This channel may help you with some examples. Cashflow is king with this form of banking. Throw all your income to the Heloc or Loc. Pay your expenses out of the line. Leave the cashflow in pay down the line make a big chunk on your debts. Rinse and repeat. I paid off 58k student loan in 18 months using this technique and many other debts. Good luck.
You are right, it is cash flow that is important, not the HELOC. In this video, he gives the example of someone who has $3800 cash flow every month, which is $45,600 of cash flow per year. In the start of the example, they have $35,000 worth of mortgage debt and $12,800 worth of HELOC debt. So they have $47,800 worth of debt and $45,600 worth of excess annual income. Of course they can pay of this debt in a little over a year! The problem is that some guru claim you pay off your mortgage without making extra principal payments, by using a HELOC. The HELOC is not necessary to pay down debt. The technique to pay down dept is making extra principal payments. Whether those payments are direct to the debt or flow through a HELOC makes very little difference. The only way to save interest in this situation is if the HELOC is at a lower interest rate than your other debt.