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
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
Whats about it seems "too good to be true"?
You accelerate the payback of the principal on an amortized loan such as a home loan, car loan, student loan, etc. by correcting some of your less supportive financial habits.
That's the short definition. There have been extensive threads here on BP and elsewhere about it. There's even a two-day class you can take to learn all about it.
It jus seems too affective i guess. People say your not making any additional payments just moving debt for the mortgage to the heloc but i just dont know wat to make of it all
It jus seems too affective i guess. People say your not making any additional payments just moving debt for the mortgage to the heloc but i just dont know wat to make of it all
You are moving debt to the HELOC, but then making additional payments on the HELOC. Bottom line is the reason velocity banking works is because you are making bigger payments every month. The point isn't that it doesn't work, the point is that a HELOC is not required to make extra principal payments. If the HELOC is a lower interest rate or if the HELOC makes it easier for you to make those extra payments, great. Anyone who tells you the HELOC by itself saves you money or tells you the key is "amortized versus simple interest" or tells you you "skip payments" - those are all misleading statements.
It jus seems too affective i guess. People say your not making any additional payments just moving debt for the mortgage to the heloc but i just dont know wat to make of it all
You are moving debt to the HELOC, but then making additional payments on the HELOC. Bottom line is the reason velocity banking works is because you are making bigger payments every month. The point isn't that it doesn't work, the point is that a HELOC is not required to make extra principal payments. If the HELOC is a lower interest rate or if the HELOC makes it easier for you to make those extra payments, great. Anyone who tells you the HELOC by itself saves you money or tells you the key is "amortized versus simple interest" or tells you you "skip payments" - those are all misleading statements.
I don't think this can be summarized any simpler than this. Save the money you were going to spend on that 2-day class and buy Joe a drink of his choice instead.
As @Wayne Brooks said. Paying more than minimums. There is only one way to pay off your mortgage or any debt. And it’s to pay the bank the amount they are owed. The faster you do this the faster the debt is gone. No magic about that. If you actually do the math on those you tubers they are paying a lot of extra on the heloc which then they use to pay off the mortgage. What’s the difference between that and just paying all the extra on mortgage?
It’s not a secret to you pay more money it goes faster.
Thanks josh. Your def right you have to pay the bank at the very least the entire principal. Does this cut down on the amount of interest over the 30 years because of the lump sum you hit the principal with ?
No. Nothing about VB will make any significant difference. Now paying your mortgage off faster will dramatically decrease total interest paid. But this was invented to sound cool. Dave Ramsey has been preaching early payoff for 30 years and his students average paying off their mortgages in 7 years.
No. Nothing about VB will make any significant difference. Now paying your mortgage off faster will dramatically decrease total interest paid. But this was invented to sound cool. Dave Ramsey has been preaching early payoff for 30 years and his students average paying off their mortgages in 7 years.
Actually, it's DOES make a significant difference, unless you find the difference between $186,511.57 and $51,378.21 - $135,133.36, difference in interest paid between full term ($200K at 5% for 30 years) and accelerated payoff - "insignificant".
... and yes, that WOULD even buy "drinks for the house" ... many times over! ... though, I can certainly think of more productive use of the money.
It works. But why would you want to pay off the mortgage if you are keeping the money working? If I can get money at 5% and invest it at 6%, I'll take all I can get. Why give it back?
No. Nothing about VB will make any significant difference. Now paying your mortgage off faster will dramatically decrease total interest paid. But this was invented to sound cool. Dave Ramsey has been preaching early payoff for 30 years and his students average paying off their mortgages in 7 years.
Actually, it's DOES make a significant difference, unless you find the difference between $186,511.57 and $51,378.21 - $135,133.36, difference in interest paid between full term ($200K at 5% for 30 years) and accelerated payoff - "insignificant".
... and yes, that WOULD even buy "drinks for the house" ... many times over! ... though, I can certainly think of more productive use of the money.
how much interest did you pay for using the heloc in that scenario?
nobody said this method doesn't work. it does, but there is no "velocity" associated with it vs just adding more to your principal payments.
Thanks for the response David. I understand the principal is the principal and theres no way around this but the same doesnt go for the interest is wat im seeing here with this strategy.
Thanks for the response David. I understand the principal is the principal and theres no way around this but the same doesnt go for the interest is wat im seeing here with this strategy.
There is no way to get around the interest either. If your loan is 4% interest and you transfer that balance to a HELOC that is 4% interest, you are paying the same interest. It can all be mathematically proven, so there is really nothing to debate.
Lots of information on this thread. Here is what I know of Velocity Banking and what me and others I personally know have done with it so far:
Paid all consumer debts and put balance onto line of credit with simple interest (Easy to have balance owed in one place)
Moved from using checking account, getting no real interest, to line of credit (PLOC, HELOC).
What it does:
When we get paid, we put our whole pay check into the Line of Credit, suppressing the balance. We pay bills when they're due (not before). If you look at the balance and how it moves, it's sort of like a staggered line, dropping when we put in our pay checks and slowly rising as we pay out the bills.
Not really magic, but using your sitting money to keep daily interest suppressed. Hope this helps a little.
Instead of implementing velocity banking w/ my HELOC, I borrowed $150K and made 2 $75K investments into multifamily syndications. Both roughly doubled in 2-3 years (which is not realistic to expect in today's market), and I reinvested the proceeds to keep it snowballing. This has created a much more sizable impact on my net worth than I would have gotten with velocity banking on that HELOC.
I do practice somewhat of a form of velocity banking by maintaining low cash liquidity and using low-cost lines of credit to fill in the gaps when needed.
No. Nothing about VB will make any significant difference. Now paying your mortgage off faster will dramatically decrease total interest paid. But this was invented to sound cool. Dave Ramsey has been preaching early payoff for 30 years and his students average paying off their mortgages in 7 years.
Actually, it's DOES make a significant difference, unless you find the difference between $186,511.57 and $51,378.21 - $135,133.36, difference in interest paid between full term ($200K at 5% for 30 years) and accelerated payoff - "insignificant".
... and yes, that WOULD even buy "drinks for the house" ... many times over! ... though, I can certainly think of more productive use of the money.
how much interest did you pay for using the heloc in that scenario?
nobody said this method doesn't work. it does, but there is no "velocity" associated with it vs just adding more to your principal payments.
Interest on the HELOC - if that's what you're using as a "velocity account" - would be around $700 a year, less than the interest portion of the first mortgage payment during the first year of the loan. A (HE)LOC is a revolving account and incurs simple interest, probably based on the average daily balance during the payment period. See your loan documents for specifics - this is a generic example.
There is *PLENTY* of "velocity" to it. Instead of bashing what you don't understand, you should first learn about it, then come back so we can have a more intelligent discourse.
Simply adding more to your principal portion will achieve a similar goal, without the side-benefits of helping your credit profile or making cash instantly available (from a HELOC or other LOC) should a sudden need arise.
Instead of implementing velocity banking w/ my HELOC, I borrowed $150K and made 2 $75K investments into multifamily syndications. Both roughly doubled in 2-3 years (which is not realistic to expect in today's market), and I reinvested the proceeds to keep it snowballing. This has created a much more sizable impact on my net worth than I would have gotten with velocity banking on that HELOC.
I do practice somewhat of a form of velocity banking by maintaining low cash liquidity and using low-cost lines of credit to fill in the gaps when needed.
Velocity banking is focused on personal debts.
For business, there may be better ways to utilize cash flow. The velocity model can, however, be used to accelerate business debt when this is desired.
Thanks for the response David. I understand the principal is the principal and theres no way around this but the same doesnt go for the interest is wat im seeing here with this strategy.
Yes. If your lender provided an amortization schedule, it should show how much of each payment goes to principal and how much to interest. Note that at the beginning, your payment is mostly interest. In the example loan - $200K at 5% for 30 years - that doesn't reverse until 3/4 of the way thru the 16th year, and by then, you've already paid MORE than the original principal in total payments to that point.
@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.
@Joshua Myers, you don't get it. Paying off debt isn't the issue if it was say 15%-18% annual interest. The issue is that if you pay off low interest debt you are basically getting a crappy return on your money. If you have a 4% mortgage and you pay it off early. Pat yourself on the back for not knowing how to invest in anything that returns above 4%. If you are trying to grow your net worth this is incredibly ignorant. The velocity bs banking method just perpetuates a gimmicky concept instead of spending time developing skills that will give you a higher return and minimizing risk.
@Ellis San Jose don't worry, I get it. You're saying that you think you can get a better return on your money if you buy risk assets on leverage as opposed to taking the low risk option of paying down a 4-6% interest loan. That's not a deep concept for a high school student. In most environments that is the more likely outcome right over the long term, but that doesn't mean choosing the lower risk option is ignorant or counter intuitive to wealth creation.
Yes, the velocity banking method is a gimmicky idea. But deciding to pay off debt as part of a long term portfolio strategy is a far cry from "incredibly ignorant." People have different goals, different risk profiles and are at different stages of their individual journey.
When you responded to my post you quoted it so I assume you read it. I said obviously paying your mortgage faster reduces interest, which no one is debating, but this fact has nothing to do with VB.
What calculator are using where practicing VB and paying your 200k 5% mortgage off in 5 years saves you 135k vs just paying extra directly on your mortgage and totally paying off in 5 years. Or 7 years or whatever number you used in your 135k saving example. That’s just not true. Where did you get those numbers?
Also, Helocs are about 6% interest rate and primary mortgages are about 3.5% interest rate. Curious to see the math.
@Ellis San Jose don't worry, I get it. You're saying that you think you can get a better return on your money if you buy risk assets on leverage as opposed to taking the low risk option of paying down a 4-6% interest loan. That's not a deep concept for a high school student. In most environments that is the more likely outcome right over the long term, but that doesn't mean choosing the lower risk option is ignorant or counter intuitive to wealth creation.
Yes, the velocity banking method is a gimmicky idea. But deciding to pay off debt as part of a long term portfolio strategy is a far cry from "incredibly ignorant." People have different goals, different risk profiles and are at different stages of their individual journey.
@Joshua Myers, Not sure why you are assuming it has to be risky. It doesn't have to be leveraged risk assets at all. It could be just a Low LTV 6-8% secured 1st TD note or prepaying insurance premiums or other prepaying of bills which is riskless.
@Ellis San Jose sure you can invest in those assets if they fit your portfolio goals, but that doesn't make paying down debt "ignorant." I have risk free inflation indexed long term fixed income assets that yield around 4%. They give me $5,853/month cash flow in 2020. I don't think I'm being "incredibly ignorant" by not trading out those assets for risk assets. Those assets have a very valuable place in my portfolio. Paying don't debt in similar, it's a risk free return on capital that can be a very intelligent investment decision depending on a persons circumstances and portfolio requirements.
Just because it doesn't make sense for you at the moment doesn't mean someone else is ignorant when they pay off debt.