Does Velocity Banking work????
Member since 2019 · 187 posts · 74 votes
Does Velocity Banking work????
Most Popular Reply
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
6yPaying 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
237 Replies
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
@Joshua S. Josh, looks like the biggest portion of your argument hinges on the average monthly balance, which is something I can't either prove or disprove. However, if you do go back to that model I've posted and plug $200k for loan amount, 4% interest, 30 year term. $5k monthly income, $3045.17 monthly non-mortgage expenses (leaves $1k disposable). Heloc at 5% with 10k to transfer and paycheck parking option as "yes". Also, adjust cell AA38 to $1k as your initial payment. According to the model, you will save $99,077 with the heloc option and $99,249 with the extra $1k of principal pmts monthly. 10.5 yrs to payoff with either scenario.
"
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."
Actually, if you were to apply your savings ($1k) as your initial payment (since you're counting $10k from heloc as your baseline), your first month's interest would've been $663.33 (calced off $199k) and second month's $659.03, so slightly better than your heloc example. You can plug this into the model in the far right table. The model was setup to take into account your disposable income ($1k) + the initial payment, but i've kept only the $1k in row 38 as a starting point.
Again, we're pinching pennies here.
Sorry, Victor, but that's not honest. I didn't make a $10K payment out of my income at the word go, I simply moved the debt from one vehicle to another. That's not a head start, it's just the beginning of the strategy. Your strategy is to go all month doing nothing and then putting your disposable income on the mortgage, so own it. If you need to move the goalposts like that maybe it's a sign that your strategy isn't as good as mine. We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES.
Unfortunately, this is the kind of disingenuous goalpost moving that always happens in these conversations. It's crazy to me that people can't just say, "Wow, I guess you're right, I never thought about it that way". Mind boggling, actually. Later.
i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...
"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."
but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.
again, if you feel like this strategy lets you get ahead, great. i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread. good luck.
"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."
You want to compare apples to apples and when I do that and prove the strategy has advantages you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say). Now you're saying, "No, no, in this example I make my payment UP FRONT... Yeah, that's what I meant!" You're inventing changes to the comparison to benefit your side of the argument. You might as well say that Spider-Man swings in and knocks me over so you can make your payment first. Have some respect for logic, for christ sake. How about I get laid off from my job as a giraffe semen collector the minute I make the first HELOC payment and you win because I have no income? Or how about you time travel and save the Titanic and use your presidential medal of honor to blind me and I accidentally send my payment to the north pole? You could at least be more creative / entertaining if you're just going to throw in random changes to cheat logic and try to save face.
"i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread."You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.
Me: "4 + 4 = 8"
You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"
Have a good one.
I'm not sure who you're trying to be all cute for with your stream of consciousness, but it ain't working on me. If you can drop $10k from your heloc as your first payment, why can't I do the same with my "strategy"? You haven't provided a compelling argument that your "velocity" strategy is even marginally better that simply paying additional principal payments.
"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."
Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!
PAYING $1K of your INCOME to the mortgage.
MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.
These two items are the same thing? Is that what you're trying to say?
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
@Joshua S. Josh, looks like the biggest portion of your argument hinges on the average monthly balance, which is something I can't either prove or disprove. However, if you do go back to that model I've posted and plug $200k for loan amount, 4% interest, 30 year term. $5k monthly income, $3045.17 monthly non-mortgage expenses (leaves $1k disposable). Heloc at 5% with 10k to transfer and paycheck parking option as "yes". Also, adjust cell AA38 to $1k as your initial payment. According to the model, you will save $99,077 with the heloc option and $99,249 with the extra $1k of principal pmts monthly. 10.5 yrs to payoff with either scenario.
"
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."
Actually, if you were to apply your savings ($1k) as your initial payment (since you're counting $10k from heloc as your baseline), your first month's interest would've been $663.33 (calced off $199k) and second month's $659.03, so slightly better than your heloc example. You can plug this into the model in the far right table. The model was setup to take into account your disposable income ($1k) + the initial payment, but i've kept only the $1k in row 38 as a starting point.
Again, we're pinching pennies here.
Sorry, Victor, but that's not honest. I didn't make a $10K payment out of my income at the word go, I simply moved the debt from one vehicle to another. That's not a head start, it's just the beginning of the strategy. Your strategy is to go all month doing nothing and then putting your disposable income on the mortgage, so own it. If you need to move the goalposts like that maybe it's a sign that your strategy isn't as good as mine. We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES.
Unfortunately, this is the kind of disingenuous goalpost moving that always happens in these conversations. It's crazy to me that people can't just say, "Wow, I guess you're right, I never thought about it that way". Mind boggling, actually. Later.
i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...
"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."
but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.
again, if you feel like this strategy lets you get ahead, great. i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread. good luck.
"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."
You want to compare apples to apples and when I do that and prove the strategy has advantages you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say). Now you're saying, "No, no, in this example I make my payment UP FRONT... Yeah, that's what I meant!" You're inventing changes to the comparison to benefit your side of the argument. You might as well say that Spider-Man swings in and knocks me over so you can make your payment first. Have some respect for logic, for christ sake. How about I get laid off from my job as a giraffe semen collector the minute I make the first HELOC payment and you win because I have no income? Or how about you time travel and save the Titanic and use your presidential medal of honor to blind me and I accidentally send my payment to the north pole? You could at least be more creative / entertaining if you're just going to throw in random changes to cheat logic and try to save face.
"i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread."You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.
Me: "4 + 4 = 8"
You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"
Have a good one.
I'm not sure who you're trying to be all cute for with your stream of consciousness, but it ain't working on me. If you can drop $10k from your heloc as your first payment, why can't I do the same with my "strategy"? You haven't provided a compelling argument that your "velocity" strategy is even marginally better that simply paying additional principal payments.
"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."
Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!
PAYING $1K of your INCOME to the mortgage.
MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.
These two items are the same thing? Is that what you're trying to say?
What's with the all-caps? Fun Friday night? Again, we were comparing paying extra vs heloc, so are you struggling with somebody having $1k to put up-front or what?
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
@Joshua S. Josh, looks like the biggest portion of your argument hinges on the average monthly balance, which is something I can't either prove or disprove. However, if you do go back to that model I've posted and plug $200k for loan amount, 4% interest, 30 year term. $5k monthly income, $3045.17 monthly non-mortgage expenses (leaves $1k disposable). Heloc at 5% with 10k to transfer and paycheck parking option as "yes". Also, adjust cell AA38 to $1k as your initial payment. According to the model, you will save $99,077 with the heloc option and $99,249 with the extra $1k of principal pmts monthly. 10.5 yrs to payoff with either scenario.
"
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."
Actually, if you were to apply your savings ($1k) as your initial payment (since you're counting $10k from heloc as your baseline), your first month's interest would've been $663.33 (calced off $199k) and second month's $659.03, so slightly better than your heloc example. You can plug this into the model in the far right table. The model was setup to take into account your disposable income ($1k) + the initial payment, but i've kept only the $1k in row 38 as a starting point.
Again, we're pinching pennies here.
Sorry, Victor, but that's not honest. I didn't make a $10K payment out of my income at the word go, I simply moved the debt from one vehicle to another. That's not a head start, it's just the beginning of the strategy. Your strategy is to go all month doing nothing and then putting your disposable income on the mortgage, so own it. If you need to move the goalposts like that maybe it's a sign that your strategy isn't as good as mine. We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES.
Unfortunately, this is the kind of disingenuous goalpost moving that always happens in these conversations. It's crazy to me that people can't just say, "Wow, I guess you're right, I never thought about it that way". Mind boggling, actually. Later.
i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...
"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."
but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.
again, if you feel like this strategy lets you get ahead, great. i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread. good luck.
"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."
You want to compare apples to apples and when I do that and prove the strategy has advantages you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say). Now you're saying, "No, no, in this example I make my payment UP FRONT... Yeah, that's what I meant!" You're inventing changes to the comparison to benefit your side of the argument. You might as well say that Spider-Man swings in and knocks me over so you can make your payment first. Have some respect for logic, for christ sake. How about I get laid off from my job as a giraffe semen collector the minute I make the first HELOC payment and you win because I have no income? Or how about you time travel and save the Titanic and use your presidential medal of honor to blind me and I accidentally send my payment to the north pole? You could at least be more creative / entertaining if you're just going to throw in random changes to cheat logic and try to save face.
"i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread."You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.
Me: "4 + 4 = 8"
You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"
Have a good one.
I'm not sure who you're trying to be all cute for with your stream of consciousness, but it ain't working on me. If you can drop $10k from your heloc as your first payment, why can't I do the same with my "strategy"? You haven't provided a compelling argument that your "velocity" strategy is even marginally better that simply paying additional principal payments.
"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."
Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!
PAYING $1K of your INCOME to the mortgage.
MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.
These two items are the same thing? Is that what you're trying to say?
What's with the all-caps? Fun Friday night? Again, we were comparing paying extra vs heloc, so are you struggling with somebody having $1k to put up-front or what?
The caps are for EMPHASIS. Are you struggling with answering the question or what?
PAYING $1K of your INCOME to the mortgage.
MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.
It's a simple question. Are these two items the same?
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
@Joshua S. Josh, looks like the biggest portion of your argument hinges on the average monthly balance, which is something I can't either prove or disprove. However, if you do go back to that model I've posted and plug $200k for loan amount, 4% interest, 30 year term. $5k monthly income, $3045.17 monthly non-mortgage expenses (leaves $1k disposable). Heloc at 5% with 10k to transfer and paycheck parking option as "yes". Also, adjust cell AA38 to $1k as your initial payment. According to the model, you will save $99,077 with the heloc option and $99,249 with the extra $1k of principal pmts monthly. 10.5 yrs to payoff with either scenario.
"
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."
Actually, if you were to apply your savings ($1k) as your initial payment (since you're counting $10k from heloc as your baseline), your first month's interest would've been $663.33 (calced off $199k) and second month's $659.03, so slightly better than your heloc example. You can plug this into the model in the far right table. The model was setup to take into account your disposable income ($1k) + the initial payment, but i've kept only the $1k in row 38 as a starting point.
Again, we're pinching pennies here.
Sorry, Victor, but that's not honest. I didn't make a $10K payment out of my income at the word go, I simply moved the debt from one vehicle to another. That's not a head start, it's just the beginning of the strategy. Your strategy is to go all month doing nothing and then putting your disposable income on the mortgage, so own it. If you need to move the goalposts like that maybe it's a sign that your strategy isn't as good as mine. We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES.
Unfortunately, this is the kind of disingenuous goalpost moving that always happens in these conversations. It's crazy to me that people can't just say, "Wow, I guess you're right, I never thought about it that way". Mind boggling, actually. Later.
i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...
"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."
but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.
again, if you feel like this strategy lets you get ahead, great. i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread. good luck.
"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."
You want to compare apples to apples and when I do that and prove the strategy has advantages you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say). Now you're saying, "No, no, in this example I make my payment UP FRONT... Yeah, that's what I meant!" You're inventing changes to the comparison to benefit your side of the argument. You might as well say that Spider-Man swings in and knocks me over so you can make your payment first. Have some respect for logic, for christ sake. How about I get laid off from my job as a giraffe semen collector the minute I make the first HELOC payment and you win because I have no income? Or how about you time travel and save the Titanic and use your presidential medal of honor to blind me and I accidentally send my payment to the north pole? You could at least be more creative / entertaining if you're just going to throw in random changes to cheat logic and try to save face.
"i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread."You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.
Me: "4 + 4 = 8"
You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"
Have a good one.
I'm not sure who you're trying to be all cute for with your stream of consciousness, but it ain't working on me. If you can drop $10k from your heloc as your first payment, why can't I do the same with my "strategy"? You haven't provided a compelling argument that your "velocity" strategy is even marginally better that simply paying additional principal payments.
"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."
Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!
PAYING $1K of your INCOME to the mortgage.
MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.
These two items are the same thing? Is that what you're trying to say?
What's with the all-caps? Fun Friday night? Again, we were comparing paying extra vs heloc, so are you struggling with somebody having $1k to put up-front or what?
The caps are for EMPHASIS. Are you struggling with answering the question or what?
PAYING $1K of your INCOME to the mortgage.
MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.
It's a simple question. Are these two items the same?
See, you've backed yourself into a corner saying stupid stuff trying to save face and pretend you're right. Now it's getting worse because you can't be a man and admit that you're wrong.
Your choices are:
A. Be a man and admit that you're wrong. Using income and moving debt are obviously two very different things and you made a mistake. It happens.
B. Continue pretending that paying money out of your income and moving debt to another loan are the same thing and hope nobody except me can tell that you're an idiot (although I'm obviously making it very clear for them).
C. Play dumb and ask me about my caps and my Friday night.
D. Not come back because you're above it, which admits that I'm right without actually saying it.
Anyway, it's up to you. I was ready to agree to disagree, but you wanted to push the issue and call in Spider-Man and Santa Claus so here we are. Hopefully this is the end. If not and you want to continue pretending then I'll just make an up front payment of $1K in my strategy since we both have the same disposable income and you're back on the losing end. To be honest, I don't really care what you think, I just find it APPALLING that people can't admit MISTAKES and I feel sorry for anyone reading this and not knowing the difference between my KNOWLEDGE and your OPINION, so I'm trying to help them out. Have a good one.
Yeezus... Two posts an hour apart. Must've hit a nerve. Thanks for laying out my choices in front of me. I really liked how you labeled an actual math-based model provided as an "opinion" and your verbal diarrhea as "knowledge". Peace be with you.
Originally posted by @Victor S.:
Yeezus... Two posts an hour apart. Must've hit a nerve. Thanks for laying out my choices in front of me. I really liked how you labeled an actual math-based model provided as an "opinion" and your verbal diarrhea as "knowledge". Peace be with you.
Option C. Good choice. You're welcome, you're welcome. Take care now. :)
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.
As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.
As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half.
Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.
As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.
As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half.
Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.
I don't think you understand the explanation of the skipping thing, so I'll try to explain.
Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)
https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
$200,000 / 30 Year / 4%
Total interest scheduled on day one: $143,739.01
Put in a lump sum $10,000 early principal payment for month one (Sept).
New total interest scheduled: $122,431.31
One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.
So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.
Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.
Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it.
How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.
So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.
Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023).
So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early.
If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.
And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.
A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.
@Joe Splitrock Or maybe an even simpler way to show the skipping thing is to pull up the same loan on the calculator and put in a one time extra principal payment of $288.16 (the principal portion of the first payment) on the first month. The total interest on the loan goes from $143,739.01 to $143,075.53, a difference $663.48 - the same amount due ($666.67) on interest for that portion of principal. I don't know why it's not "exact - I think it's because of the "time" factor and the fact that when you pay additional principal you're "skipping" interest, but you're not choosing which interest you're skipping. When it's recalculated with the slight difference in time and principal balance it comes out a few dollars off. In other words, stretching out a different balance over the same time frame is bound to change the calculation a little, but I don't think it's statistically significant.
But do a bunch of examples and it works out close enough that I can't see how another explanation would make as much sense or be as accurate. The principal portions of the first five months comes to $1450.46. The interest portion comes $3323.71. When you put in the $1450.46 extra payment the total interest goes from $143,739.01 to $140,431.07, a difference of $3307.94 - within $20 of the $3323.71. But like I said, if you think there's a better explanation, let's see it. If this is wrong I'd be happy to see where the savings really come from.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.
As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.
As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half.
Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.
I don't think you understand the explanation of the skipping thing, so I'll try to explain.
Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)
https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
$200,000 / 30 Year / 4%
Total interest scheduled on day one: $143,739.01
Put in a lump sum $10,000 early principal payment for month one (Sept).
New total interest scheduled: $122,431.31
One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.
So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.
Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.
Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it.
How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.
So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.
Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023).
So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early.
If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.
And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.
A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.
It is ironic you are saying I am immune to "simple rational explanations" and yet your response was way long and confusing. You don't skip interest payments. You pay interest based on principal outstanding. You pay interest on a mortgage or HELOC if you have a balance.
The reason you pay off a mortgage early is because the payment is a fixed amount. When you pay off principal, it reduces interest, therefore more of your payment goes to principal. In other words you accelerate your principal pay down in two ways - the extra principal payment and the extra amount from your standard payment that goes to principal. If that coincidentally makes it look like you skipped down the amortization table, then it is only a coincidence.
Maybe we can agree to disagree. You were making some personal attacks in the last response and that is considered trolling on this site. Just don't respond if that is where you want to take this.
Sounds like we are just talking semantics at this point. I think everyone agrees that you’d pay less interest on the traditional mortgage side if you make additional principal payments.
After reading this whole thread, the only thing I'm still not clear on is if there is actually a compound savings effect relative to the average daily value calculation of interest between the "HELOC" method vs "additional principal payment" method. Or, does that "$5/month savings" really just stay "$5/month" for the subsequent months also?Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.
As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.
As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half.
Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.
I don't think you understand the explanation of the skipping thing, so I'll try to explain.
Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)
https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
$200,000 / 30 Year / 4%
Total interest scheduled on day one: $143,739.01
Put in a lump sum $10,000 early principal payment for month one (Sept).
New total interest scheduled: $122,431.31
One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.
So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.
Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.
Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it.
How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.
So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.
Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023).
So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early.
If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.
And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.
A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.
Your entire explanation falls down here: "One $10,000 early principal payment saves $21,307.70 interest" negating the rest of the post.
A dollar today is worth more than a dollar a year from now. That $21k is comprised of dollars "saved" in years 1,2,3,...30 and all are worth less than a dollar today. So the $10k to $21k is an apples to oranges comparison.To make an apples to apples comparison, you'd need to find the present value of the monthly savings and see if that number is larger or smaller than $10k. In order to get the present value you need a discount rate, which will be different for everyone, but finding your individual weighted average cost of capital could get you in the ball park.
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Coming at this a different way, we could figure out when using velocity banking and regular pay down are equal: Interest (Velocity)= Interest (Regular)
+Interest (Regular)= Rate(mortgage)* Principal
+Interest (Velocity)= rate(mortgage)*(Principal-x)+ Rate(Heloc)*Average Daily Balance where X is the amount of your Heloc applied to the mortgage.
Setting the two equal to each other and simplifying:
+Rate(H)* ADB= Rate(M)*X
Thus your ADB has to be equal or less than [rate(m)/rate(h)]*X
In your example with Heloc rate of 5% and mortgage or 4%, your ADB has to be 80% or less of the total Heloc applied to the mortgage for this to make sense. The larger the delta between the two rates, the lower your ADB must be for this strategy to make sense. Given what we can expect to see with rates interest rates in the next 2-4 years, it doesn't bode well.
Originally posted by @Bill F.:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.
As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.
As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half.
Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.
I don't think you understand the explanation of the skipping thing, so I'll try to explain.
Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)
https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
$200,000 / 30 Year / 4%
Total interest scheduled on day one: $143,739.01
Put in a lump sum $10,000 early principal payment for month one (Sept).
New total interest scheduled: $122,431.31
One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.
So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.
Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.
Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it.
How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.
So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.
Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023).
So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early.
If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.
And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.
A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.
Your entire explanation falls down here: "One $10,000 early principal payment saves $21,307.70 interest" negating the rest of the post.
A dollar today is worth more than a dollar a year from now. That $21k is comprised of dollars "saved" in years 1,2,3,...30 and all are worth less than a dollar today. So the $10k to $21k is an apples to oranges comparison.To make an apples to apples comparison, you'd need to find the present value of the monthly savings and see if that number is larger or smaller than $10k. In order to get the present value you need a discount rate, which will be different for everyone, but finding your individual weighted average cost of capital could get you in the ball park.
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Coming at this a different way, we could figure out when using velocity banking and regular pay down are equal: Interest (Velocity)= Interest (Regular)
+Interest (Regular)= Rate(mortgage)* Principal
+Interest (Velocity)= rate(mortgage)*(Principal-x)+ Rate(Heloc)*Average Daily Balance where X is the amount of your Heloc applied to the mortgage.
Setting the two equal to each other and simplifying:
+Rate(H)* ADB= Rate(M)*X
Thus your ADB has to be equal or less than [rate(m)/rate(h)]*X
In your example with Heloc rate of 5% and mortgage or 4%, your ADB has to be 80% or less of the total Heloc applied to the mortgage for this to make sense. The larger the delta between the two rates, the lower your ADB must be for this strategy to make sense. Given what we can expect to see with rates interest rates in the next 2-4 years, it doesn't bode well.
First of all, explain this idea to me that you save over 30 years. I'm really curious about it. Here's why I think it's not true. Imagine two people that purchase houses next door to one another for the same amount, same terms. For simplicity, the $200K / 4% / 30 year mortgage we've been discussing, except neighbor #1 has an extra $50K to put down, so his balance is $150K. That extra $50K down saves him just under $36K on interest vs neighbor #2.
So, here's the question. #1 "saved" it relative to #2, meaning that it was never scheduled and can never be accrued, but you're telling me that he somehow "accumulates" these savings over the years simply because we know that his neighbor bought the other house and what he's paying in interest? According to my thinking, he saved it when he signed up for a smaller mortgage, period. Obviously, it didn't show up in his bank account or something, but he never went on the hook for it / deleted it from the calculation, so it's saved immediately. What if #2 lied and his balance is only $190K? Does that affect how much #1 saves or when? What about if neighbor #2 never existed and neighbor #1 decided at the last minute to put down the extra $50K and the savings are only relative to what he planned on doing 5 minutes ago? Does that mean that he has to collect the $36K over the next 30 years or did he just avoid going on the hook for the money in the first place and save it immediately?
Sub-question: If I decided to buy a new car just now for $30K and in the next minute I decided to buy a used car for $15K, I just saved $15K, but how long do I have to wait to collect it? 60 months? 75 months? Or is it the same as with the mortgage and I still have to wait 30 years?
I think (hope) you can see the absurdity of the idea that you have to somehow wait for savings to accumulate over some number of years simply because the mortgage was "scheduled" to be paid, but let me know. By that rationale, if I have the cable guy "scheduled" to come tomorrow and I need to "save" some time because something else came up, I have to cancel the appointment and then accumulate the saved time over the course of the next week or month or something. What do you think - cancel the appointment / time saved immediately, right? Maybe you don't like that because it's only a four hour time window (let's be honest - 8 hour). What about instead of the cable guy I decide to become a janitor instead of a doctor and I saved myself 12 years of time in school? When do I get that time back - is it like a 30 year time frame again? 42 years? Can I pass some of the time down to my kids if I pass away before I've gotten it all back?
Obviously, I'm kidding for effect, but super smart people say wacky stuff all the time and if you don't drill them with what they're actually saying sometimes they still can't get it, because they're just that conditioned or whatever. Hopefully, you'll just snap out of it, but it's pretty rare.
Secondly, even if you somehow can't see that what you're saying is wrong, randomly applying the effects of inflation (a dollar is worth more today than in a year) doesn't make sense, either. I don't get a 50% off coupon and think, "Well, what's the use? I could save the money, but inflation is just going to get me in the end, so I might as well just spend more money" or see a great investment and think, "Well, I want to invest, but inflation is going to eat into whatever I gain, so it's not really worth it". Inflation is what it is and it's applied evenly across everything, so there's no place for it in this conversation. Yes, your "investments" should beat inflation if you ever want to make any money - everyone knows this - but other than that inflation doesn't affect anything more or less relative to anything else (house vs car vs college tuition vs a new TV), so there's no reason to account for it in this discussion. Let me know what you think.
- Bolingbrook Illinois · Member since 2018 · 50 posts · 33 votes6y
@NIcholas Hamel
The only way to pay a mortgage loan off in 5 to 10 years is to PAY more towards the principal. Look, if you have a 100k loan at 3% for 30 years your payments (principal and interest) will be $421.60. That's principal AND INTEREST. If the entire payment went to principal and none to interest (let's say the lender is willing to forgo the interest for the sake of this illustration) it would take 19.76 years (100k/ $421.60) to pay off the principal. 100% of your payments going towards principal and still no where near paying it off in 5 to 10 years. Paying more towards principal is the only way to pay it down in that few years!
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Victor S.:
Originally posted by @Thomas Rutkowski:
@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)
Whether or not it makes sense to pay down the equity has been beat to death in other threads.
except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.
Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.
I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.
Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.
Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.
Couple weeks go by and you get another paycheck and your new balance is $4K.
Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.
All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.
So, you're concerned with the differences vs just paying extra principal.
Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.
Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.
Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.
Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?
Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:
Here is one months interest calculation for both:
$7,500 @ 3% for one month is $18.75
$9,000 @ 3% for one month is $22.75
Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.
The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.
So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.
$7,500 @ 4% for one month is $25
$9,000 @ 3% for one month is $22.75
Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.
Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.
On a $200K mortgage @ 4% your interest on the first month is $666.67.
On a $190K balance @ 4% my interest on the first month is $633.33.
On a $7.5K balance @ 5% my interest on the first month is $31.25.
$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.
LOL at $2, right?
Second Month
Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.
My new balance is $189,709.84. Interest is $632.37.
My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.
$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.
Third Month
Your new balance is $197,419.38. Interest this month is $658.06.
My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.
My new HELOC ADB is of course $5.5K. Interest is $22.92.
$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.
So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)
The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.
So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.
My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.
I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.
Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.
A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.
B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.
Does this look correct to you? Both A and B are true, right?
It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:
1. How much you are able to pay down and for how many days of the month.
2. Interest rate of the HELOC versus mortgage.
One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.
But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.
To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.
I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.
The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.
My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay.
I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.
There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.
So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.
Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.
Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.
As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.
As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half.
Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.
I don't think you understand the explanation of the skipping thing, so I'll try to explain.
Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)
https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
$200,000 / 30 Year / 4%
Total interest scheduled on day one: $143,739.01
Put in a lump sum $10,000 early principal payment for month one (Sept).
New total interest scheduled: $122,431.31
One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.
So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.
Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.
Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it.
How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.
So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.
Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023).
So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early.
If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.
And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.
A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.
It is ironic you are saying I am immune to "simple rational explanations" and yet your response was way long and confusing. You don't skip interest payments. You pay interest based on principal outstanding. You pay interest on a mortgage or HELOC if you have a balance.
The reason you pay off a mortgage early is because the payment is a fixed amount. When you pay off principal, it reduces interest, therefore more of your payment goes to principal. In other words you accelerate your principal pay down in two ways - the extra principal payment and the extra amount from your standard payment that goes to principal. If that coincidentally makes it look like you skipped down the amortization table, then it is only a coincidence.
Maybe we can agree to disagree. You were making some personal attacks in the last response and that is considered trolling on this site. Just don't respond if that is where you want to take this.
Ha. Yes, that response was very long. The reason is because you're not listening and I'm giving you a dozen examples hoping something will stick. You're right, when you pay $10K extra toward principal your subsequent payments are $33.34 less to interest and more to principal. But as I said, that only comes out to about $12K over the course of the loan and doesn't account for over $21K in savings. I was hoping that you'd actually be able to show the math of where the savings come from, but I guess it's not in the cards.
The thing I will never understand is that if I win the lotto and pay off the balance on the house overnight, I eliminate / skip all the interest that is scheduled for the next 30 years. No one - including you - has disputed that. Completely eliminating / skipping mortgage interest by paying principal early is that simple if you hypothetically win the lottery or make a great investment and just have the cash to do it overnight. It's not a figment of my imagination. The idea is crystal clear that when you give back their money early, you no longer owe the scheduled interest, so you eliminated it completely. I mean, hell, you keep saying that you pay interest based on how much you owe on principal. You keep saying it over and over like a mantra. Well, the reverse is true, too. If you pay the money back early, then your interest is no longer scheduled - it's completely eliminated. So, all of that is brain dead simple to anyone reading this.
BUT HOLD ON NOW. When you're paying the principal back early in "chunks", now you're not eliminating or skipping interest completely, it must be some other mechanism at play. It's the function of your normal payment going $30 more toward principal than before or the fact that you're saving money over the next few decades or maybe Betty White blessed my payments and made them more powerful or something. There's got to be another reason BESIDES skipping interest completely, because that only works when you're paying off the WHOLE AMOUNT all at once. I just can't figure out what could be causing the savings, you know? It's a big mystery. LOL
Anyway, yes, I'm happy to agree to disagree. Take it easy.
I think you've made what amounts to a simple capital budgeting question, into this over complex ball of yarn that no one can untangle.
I think all of the examples in your question are different situations that require a different question than we have on out hands here. The first one is an optimum down payment question, not a pre payment question. The car and cable guy situations make no sense, at least to me.
I said nothing about inflation, this is about Time Value of Money and opportunity costs. It is about figuring out which option, regular pay down, velocity pay down, or no pay down, is best option in a given set of circumstance.
How about this: I'll concede, if I could find a Heloc with a lower rate than my primary mortgage, say at least 50 basis points, I'd use the velocity in a heartbeat.
Do you concede that if the Heloc rate is significantly above the mortgage rate that velocity method becomes a worse choice than simply paying off principle?
Originally posted by @Bill F.:
I think you've made what amounts to a simple capital budgeting question, into this over complex ball of yarn that no one can untangle.
I think all of the examples in your question are different situations that require a different question than we have on out hands here. The first one is an optimum down payment question, not a pre payment question. The car and cable guy situations make no sense, at least to me.
I said nothing about inflation, this is about Time Value of Money and opportunity costs. It is about figuring out which option, regular pay down, velocity pay down, or no pay down, is best option in a given set of circumstance.
How about this: I'll concede, if I could find a Heloc with a lower rate than my primary mortgage, say at least 50 basis points, I'd use the velocity in a heartbeat.
Do you concede that if the Heloc rate is significantly above the mortgage rate that velocity method becomes a worse choice than simply paying off principle?
Thank god, some flexibility. Seems like I'm finally getting through to somebody. :) The problem is, the time value of money isn't useful as a calculation or comparison, so it's worthless in this case. The basic theory that money is worth more now than later is true, but once you get past that there's no way to know the actual value. Am I in an income mutual fund, a savings account, or a checking account? Did I purchase a rental, make a personal loan, or buy the Yankees? Since there are so many variables, the time value of money is always incalculable and worthless as a comparison.
But here's the other issue - that's the wrong way of thinking, anyway. Most people (probably including you) have a few thousand dollars sitting in their checking account at all times doing absolutely nothing for them. So, instead of asking what the TVM / opportunity cost is on the money I'm putting into my mortgage / HELOC, you should be asking what the opportunity cost is on letting your money gather dust in your checking account. Again, you can't really calculate or compare differences numerically, but you can definitely tell the difference between my spending money working for me all the time and yours sitting there doing nothing. I'm earning a return of X and you're earning $0, so you have the opportunity cost, not me. If you shift your thinking to be more concerned with keeping your spending money working for you, you'll see that it doesn't really matter what my return is when you compare it to "nothing".
I'll concede that if your HELOC interest is too high you can negate some of the benefits, but even that's uncomfortable to say, because I don't think it's a significant factor. The arbitrage between the two interest rates is not the issue. If you go a few pages back, I do an apples / apples comparison where the mortgage rate is 4% and the HELOC is 5% and the HELOC strategy still comes out slightly ahead of simply paying principal because of the other mechanisms at play, but that's still missing the point.
Here's the main thing I think people are always missing. You should stop thinking about your interest RATE and start thinking about your interest COST. For the average person, it costs about $21K in interest and 2 years to pay down $10K worth of principal via the amo schedule. Now YES, if you have $10K lying around that you won't miss you can throw it on the mortgage and save that amount, but I'm sure we can agree that most people don't have that money lying around or they do, but don't want to simply throw it on the mortgage. I take that $10K piece of my mortgage and put it on the HELOC and then through my natural "income in / bills out" banking, it's paid down in 6-10 months and a fraction of the interest, maybe $1000. So, stop now and think about that. I'm not talking about the interest rates or arbitrage or anything else except the COST in both time and dollars and I come out ahead every time - $21K vs $1K and 2 years vs 6-10 months.
I mean, hell, when I first started doing this strategy I used a PLOC at 8% and that was still only like $1500/year worth of interest. Obviously, a lower interest rate is important over time so you can avoid paying too much in interest, but unfortunately people have had that drilled into them so hard that they're no longer looking at the COST of the interest and that's the only important factor in this comparison. Now, of course, as time goes on the savings decreases, because less interest is owed, but early on the COST of NOT doing this strategy is MASSIVE. Moving a chunk of money over to the HELOC lowers the COST of paying it down in both time and dollars and that's what saves you money, not the arbitrage. Again, if you have an extra $10K every 6-10 months or whatever that you want to put on the mortgage, then go ahead, but if not this is a way to do the same thing. But you also have to remember, simply paying extra principal DOESN'T A) keep your money working for you all the time like I explained or B) temporarily depress your mortgage balance until you need the funds for bills, so this strategy will always be at least somewhat better.People always bring up that they'd rather "invest" their money, but no one said anything about savings or investments - this is about your spending money / checking account. I have investments, savings, rentals, college savings for my kids, etc. - everything that you have. But I don't have a checking account that just sits there all month and that is the point. Using a revolving debt instrument and your mortgage as a "checking account" is simply more efficient banking. The combined opportunity costs for all the checking accounts across the country must be at staggering, absurd (BONKERS, RIDICULOUS, EGREGIOUS, HARROWING, INSANE) levels, but it's just accepted because that's what our parents taught us to do and nobody knows any better. Well, not while I'm around. :)
Looks like we have no hope of ever getting on the same sheet of music to have a constructive dialogue.
I appreciate the time and effort you've taken to respond and wish you the best of luck in all your future endeavors.
Originally posted by @Bill F.:
Looks like we have no hope of ever getting on the same sheet of music to have a constructive dialogue.
I appreciate the time and effort you've taken to respond and wish you the best of luck in all your future endeavors.
Same to you!
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
Originally posted by @David Dachtera:
Originally posted by @Richard Jumonville:
I too looked at this and saw some advantages, just depends on what your up to in your investing. I'm not doing this due to I need my cash.
There are some interest saving advantages by not holding cash in your savings or checking when you have debt which helps escalate the principal pay down.
The heloc allows you to have access cash when needed.
With this said you can use 100% of your savings and 100% of your income to put towards principal.
So with this strategy you are paying down your principle faster than a typical family for 2 reasons. Your paying extra our of your income directly to principal and you are not paying interest on loans due to your savings is covering a chunk of loan principal.
Only thing is that the heloc can be called due at any time.
I found a spread sheet and I ran the calculations both ways.
1st using 100% of heloc on primary principal of mortgage.
2nd using only 10% of heloc on primary principal of mortgage.
Both of the above came out with a similar outcome. Because you are just moving debt.
The big advantages came from, not paying interest on loans due to dead cash in savings and using 100% of your income towards principal.
Again, no one is talking about "moving debt". Make sure you understand that. If not, feel free to ask questions.
That said, of course, it *IS* possible to get a 1st Lien HELOC. Some lenders still do that. This can have some advantages. However, make sure it appears as a real estate loan on your credit report. Some lenders slip up on that - notably, BMO Harris. If it's not coded properly, it will count against your revolving credit utilization which could be a serious issue on your credit profile.
... and even a 1st Lien HELOC can be accelerated!
What banks are you seeing that are still issuing 1st lien HELOCs?
Who do it correctly?
Thank you!
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes6y
Originally posted by @Alec Hilliard:
Originally posted by @David Dachtera:
Originally posted by @Richard Jumonville:
I too looked at this and saw some advantages, just depends on what your up to in your investing. I'm not doing this due to I need my cash.
There are some interest saving advantages by not holding cash in your savings or checking when you have debt which helps escalate the principal pay down.
The heloc allows you to have access cash when needed.
With this said you can use 100% of your savings and 100% of your income to put towards principal.
So with this strategy you are paying down your principle faster than a typical family for 2 reasons. Your paying extra our of your income directly to principal and you are not paying interest on loans due to your savings is covering a chunk of loan principal.
Only thing is that the heloc can be called due at any time.
I found a spread sheet and I ran the calculations both ways.
1st using 100% of heloc on primary principal of mortgage.
2nd using only 10% of heloc on primary principal of mortgage.
Both of the above came out with a similar outcome. Because you are just moving debt.
The big advantages came from, not paying interest on loans due to dead cash in savings and using 100% of your income towards principal.
Again, no one is talking about "moving debt". Make sure you understand that. If not, feel free to ask questions.
That said, of course, it *IS* possible to get a 1st Lien HELOC. Some lenders still do that. This can have some advantages. However, make sure it appears as a real estate loan on your credit report. Some lenders slip up on that - notably, BMO Harris. If it's not coded properly, it will count against your revolving credit utilization which could be a serious issue on your credit profile.
... and even a 1st Lien HELOC can be accelerated!
What banks are you seeing that are still issuing 1st lien HELOCs?
Who do it correctly?
Thank you!
Ask around. Start with your current lien holder, then with community banks and other institutional lenders. They're not uncommon. The current lending environment is a bit challenging right now, though ...
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