Does Velocity Banking work????
Member since 2019 · 187 posts · 74 votes
Hey everyone ive been hearing about and researching VELOCITY BANKING alot lately. Seems too good to be true. Any of you experts have experience in this field and can confirm or deny? Thanks everyone!
Nick
Paying off a low interest mortgage instead of acquiring profitable assets is counter intuitive to creating wealth. It's a distraction, it's just creating a fancy name "Velocity Banking" and treating it like a magic wand without testing the financial math behind the whole philosophy. It's a gimmick
I utilize a 1st Lien HELOC on my house. I would never go back to a mortgage. It is all about the terms of each individual bank. By changing nothing about our daily routine we have paid off over 10k on our principle sense Oct and we now have tons of equity that is at any moment in time mine to use for whatever i want and it doesn't cost me cash refi amounts of money to get it. I love this system.
I utilize a 1st Lien HELOC on my house. I would never go back to a mortgage. It is all about the terms of each individual bank. By changing nothing about our daily routine we have paid off over 10k on our principle sense Oct and we now have tons of equity that is at any moment in time mine to use for whatever i want and it doesn't cost me cash refi amounts of money to get it. I love this system.
yeah, sure thing, Joseph...
I just shared my personal experience is all. It does not work for everyone. It works really well for me and my family. I don't mind if you don't believe me.
I just shared my personal experience is all. It does not work for everyone. It works really well for me and my family. I don't mind if you don't believe me or not.
Hi Joseph, which bank did you use to obtain the 1st lien HELOC?
I used SouthState Bank. it was a 80% LTV and they do a AVM appraisal (and knowing what i know now i would gladly pay the 500 for a full appraisal as my value came back crazy low). I got a line of 205k and at that time (Oct) my balance was at 184k and as of today it is hovering around the 165k range. Every bank will be different in there terms and conditions and understand what to look for is the most important part. It can be a bad bad deal if the terms are not correct.
I used SouthState Bank. it was a 80% LTV and they do a AVM appraisal (and knowing what i know now i would gladly pay the 500 for a full appraisal as my value came back crazy low). I got a line of 205k and at that time (Oct) my balance was at 184k and as of today it is hovering around the 165k range. Every bank will be different in there terms and conditions and understand what to look for is the most important part. It can be a bad bad deal if the terms are not correct.
my beef was with your "changed nothing and shaved 10k off principal" more than anything. where did that money come from? has to be magic.
Our finances were so segregated into different things that once I decided to put all of our finances into the 1st Lien HELOC it really did and continues to do major damage. No it really isn't magic but really has been how the math has played out whenever I utilized 100% of my income into one place. Not everyone will see that kind of result for sure but it all depends on the situation and the terms of the agreement. in Oct when we closed our line was set at 205k with 80 LTV and we had a balance of 184k and as of today with just the adjustment of where and how we spent our money without any drastic changes we now have a balance of approx 168k.
Our finances were so segregated into different things that once I decided to put all of our finances into the 1st Lien HELOC it really did and continues to do major damage. No it really isn't magic but really has been how the math has played out whenever I utilized 100% of my income into one place. Not everyone will see that kind of result for sure but it all depends on the situation and the terms of the agreement. in Oct when we closed our line was set at 205k with 80 LTV and we had a balance of 184k and as of today with just the adjustment of where and how we spent our money without any drastic changes we now have a balance of approx 168k.
ok, so you park every penny there now, this makes more sense. did you used to have savings after all your prior expenses before you did this?
Yes I park my money there (and actually use a 0% credit card to do offset accounting to speed up the process even quicker) and yes i did have about 7k in savings before moving it to the HELOC... BUT i instantly used that to purchase a car so it really kinda offset itself.
Yes I park my money there (and actually use a 0% credit card to do offset accounting to speed up the process even quicker) and yes i did have about 7k in savings before moving it to the HELOC... BUT i instantly used that to purchase a car so it really kinda offset itself.
i meant monthly savings after all living expenses.
@NIcholas Hamel if by does it work you mean you get a much lower return than a good investment than yes it works. You can find much better things to do with your money.
Yes I park my money there (and actually use a 0% credit card to do offset accounting to speed up the process even quicker) and yes i did have about 7k in savings before moving it to the HELOC... BUT i instantly used that to purchase a car so it really kinda offset itself.
All you are doing is trading money in you checking account for equity in your property. You could do that with a mortgage if you chose too and use the 0% credit card for living expenses. It would work out the same. Interest on a HELOC is simple interest just like a mortgage, so you are not saving interest.
You could lock your primary residence into a 15 year loan at 2.25% and you could take any extra cash and invest it for 6%+ return.
The problem with HELOC is credit limits can be decreased and most HELOC are variable rate interest. That may work great right now, but two or three years form now, you end up paying more. Compare that to a fixed rate loan and it never changes.
I have a HELOC on my primary residence and I use it for investing. I use it to acquire properties and then I refinance into long term fixed rate debt. Mathematically you want to hold debt in the lowest interest loan.
What is your interest rate on your HELOC?
my current interest rate is 2.74 . I am glad there are multiple ways for people to find success.
@Joseph Helms I will encourage you to keep an open mind and listen to what I have to say.
Using extra cash you paid your balance down from $184K to $168K. That cash would have otherwise been sitting in a bank account, but instead you put it to work paying down the HELOC. That is how the HELOC method works and the theory is putting that money to work reduces interest. It does save interest, because paying down principal on most any loan saves interest (talking standard mortgages, car loans, credit cards and HELOC). In your case at 2.74%, that extra $16K worth of pay down equals $438.14 worth of interest per year at 2.74%. So your pay down is saving you $36.43 per month.
Let's look at a different scenario. If you had taken that $184K out on a 15 year loan at 2.25%, the annual interest would approximate $3780 in year one. In your current situation, interest on $168K at 2.74% is $4603. In other words, even with $16K worth of pay down on the loan, you are still paying $823more interest in year one. You could rightly argue, "yes but I paid off $16K worth of debt". That is true, but you would have the $16K regardless of whether you took out a HELOC or conventional mortgage. The money would have been in bank account (provided you controlled your spending). You could just have easily put that $16K towards paying down a standard mortgage.
Here is the bottom line, using a HELOC in your situation is costing you more money than if you had secured a 15 year fixed loan on the property.
The greater risk that I see is you are saying the interest rate is currently 2.74%. That implies the rate is either a teaser rate or variable rate loan. When that rate goes up, the situation I described only gets worse.
There are multiple ways to find success, but taking the faster route is generally better.
@Joseph Helms, @Joe Splitrock, @Victor S., @Zachary Beach, @Jibu V.,
Have you ever heard the expression “stepping over dollars to pick up dimes?” That is what the discussion of the velocity of banking is. The purpose of the velocity of banking is to try to pay off your primary home faster using psychological motivation techniques. However, your home mortgage is usually your cheapest money that you can possibly borrow. Rather than focusing on saving money by paying off my cheapest money possible, I focus on learning how to create wealth by learning how to use cheap money to create much, much, more money. People would do well bye not wasting time trying to figure out the velocity of banking and instead focus on learning how to create wealth through real estate. I’ve been in mastermind groups with people who have hundreds of millions of dollars. And nobody in those groups talk about the velocity of banking. So if you want to keep your mindset small, keep talking about the velocity of banking. If you want to create real wealth, focus on bigger things that create more wealth.
Have you ever heard the expression “stepping over dollars to pick up dimes?” That is what the discussion of the velocity of banking is. The purpose of the velocity of banking is to try to pay off your primary home faster using psychological motivation techniques. However, your home mortgage is usually your cheapest money that you can possibly borrow. Rather than focusing on saving money by paying off my cheapest money possible, I focus on learning how to create wealth by learning how to use cheap money to create much, much, more money. People would do well bye not wasting time trying to figure out the velocity of banking and instead focus on learning how to create wealth through real estate. I’ve been in mastermind groups with people who have hundreds of millions of dollars. And nobody in those groups talk about the velocity of banking. So if you want to keep your mindset small, keep talking about the velocity of banking. If you want to create real wealth, focus on bigger things that create more wealth.
So what you're saying is, I need to be tapping my HELOC and buying some Gamestop instead? Calling my banker and broker right now.
@Victor S. It depends. Are you a good stock trader?
@Joseph Helms, @Joe Splitrock, @Victor S., @Zachary Beach, @Jibu V.,
Have you ever heard the expression “stepping over dollars to pick up dimes?” That is what the discussion of the velocity of banking is. The purpose of the velocity of banking is to try to pay off your primary home faster using psychological motivation techniques. However, your home mortgage is usually your cheapest money that you can possibly borrow. Rather than focusing on saving money by paying off my cheapest money possible, I focus on learning how to create wealth by learning how to use cheap money to create much, much, more money. People would do well bye not wasting time trying to figure out the velocity of banking and instead focus on learning how to create wealth through real estate. I’ve been in mastermind groups with people who have hundreds of millions of dollars. And nobody in those groups talk about the velocity of banking. So if you want to keep your mindset small, keep talking about the velocity of banking. If you want to create real wealth, focus on bigger things that create more wealth.
Great advice. It is like the Dave Ramsey method of paying off your smallest debt first regardless of interest rate. It is aimed at a phycological effect. Nobody will get rich paying off a $1000 credit card. You get what you focus on. I need to spend less time convincing broke people that velocity banking is a waste of time and spend more time on bigger things.
what's the difference between 15 year HELOC as 1st lien and 30 year fix if you pay 30 year with double payment of principle where you paid-it-off in 10 years, result will almost similar anyway.
@Joe Splitrock We need to do some masterminding together and focus on bigger things.
I do agree it sounds purely psychological. All the explanations I've heard involve paying more toward the mortgage than you normally would, with the HELOC available as the emergency fund vs. savings account. My view is that I could do this anyway without a complex banking strategy.
Although, as a real estate investor, the opportunity cost of tying your capital up into your primary residence is too high, unless you can turn right around and tap into it (e.g. by applying for a HELOC).
@Victor S. It depends. Are you a good stock trader?
I don't there there ever would be a case where someone should mortgage their house (literally) and play the stock market with it. I can't say I haven't thought about that, but I haven't tapped out my margin yet either.
The basic concept of Velocity Banking is to do not let you money sitting idle in bank account and earn nothing. For example, if you get your salary on the 15th of the month and pay your mortgage on the first day of next month, there are 15 days that the money earns no interest. With Velocity Banking, we first borrow the money from the HELOC and pay the mortgage one month earlier, thus save one month's mortgage payment, but we need to pay interest for the HELOC, in the above example, 15 days interest. So we trade one month's mortgage interest for less than one month HELOC's interest.
In practice, most people using Velocity Banking are paying more and earlier for the mortgage payment. Let’s separate the issues here. We are not here to talk about whether paying off loan earlier good or bad. If we want to pay off our loan earlier, we can achieve that even without using Velocity Banking.
So let’s discuss if we do not pay more each month, whether the Velocity Banking still worth it. For example, a mortgage’s monthly payment is $1000, with 3% interest. Each month we can ONLY get $1000 at the 15th of each month for the mortgage, NO MORE, and NO LESS. Then let's see whether it is worth it. If you know the concept of Velocity Banking, you'll know that the effect of the Velocity Banking is equivalent to pay one-time, one month's payment as capital payment earlier. In the above example, it means you pay $1000 capital off earlier. That will save you $30 interest per year with 3% interest. However, you need to pay the interest for the HELOC, in the above example, since we receive the money in 15th of the month that means we need to pay 15 days’ interest for HELOC each month. If the HELOC’s interest is the same as mortgage rate as 3%, the HELOC’s interest will be $15 per year, so we saved $30 - $15 = $15 per year.
Of course, how much can we actually save depends on HELOC's interest, and which day we can receive our mortgage payment (in the above example we assume we can receive it in the 15 days of each month). We may even have loss if HELOC's interest is too high and the days we receive the mortgage payment are too late (at the end of each month). But the maximum we can save is $30 per year. So does it really worth it to save at maximum $30 per year with so much hustle. At least NOT to me!
The basic concept of Velocity Banking is to do not let you money sitting idle in bank account and earn nothing. For example, if you get your salary on the 15th of the month and pay your mortgage on the first day of next month, there are 15 days that the money earns no interest. With Velocity Banking, we first borrow the money from the HELOC and pay the mortgage one month earlier, thus save one month's mortgage payment, but we need to pay interest for the HELOC, in the above example, 15 days interest. So we trade one month's mortgage interest for less than one month HELOC's interest.
In practice, most people using Velocity Banking are paying more and earlier for the mortgage payment. Let’s separate the issues here. We are not here to talk about whether paying off loan earlier good or bad. If we want to pay off our loan earlier, we can achieve that even without using Velocity Banking.
So let’s discuss if we do not pay more each month, whether the Velocity Banking still worth it. For example, a mortgage’s monthly payment is $1000, with 3% interest. Each month we can ONLY get $1000 at the 15th of each month for the mortgage, NO MORE, and NO LESS. Then let's see whether it is worth it. If you know the concept of Velocity Banking, you'll know that the effect of the Velocity Banking is equivalent to pay one-time, one month's payment as capital payment earlier. In the above example, it means you pay $1000 capital off earlier. That will save you $30 interest per year with 3% interest. However, you need to pay the interest for the HELOC, in the above example, since we receive the money in 15th of the month that means we need to pay 15 days’ interest for HELOC each month. If the HELOC’s interest is the same as mortgage rate as 3%, the HELOC’s interest will be $15 per year, so we saved $30 - $15 = $15 per year.
Of course, how much can we actually save depends on HELOC's interest, and which day we can receive our mortgage payment (in the above example we assume we can receive it in the 15 days of each month). We may even have loss if HELOC's interest is too high and the days we receive the mortgage payment are too late (at the end of each month). But the maximum we can save is $30 per year. So does it really worth it to save at maximum $30 per year with so much hustle. At least NOT to me!
Deep down, I thought (was hoping?) you were actually about to explain the magic behind it. I guess this only further confirms the opposing view.
The basic concept of Velocity Banking is to do not let you money sitting idle in bank account and earn nothing. For example, if you get your salary on the 15th of the month and pay your mortgage on the first day of next month, there are 15 days that the money earns no interest. With Velocity Banking, we first borrow the money from the HELOC and pay the mortgage one month earlier, thus save one month's mortgage payment, but we need to pay interest for the HELOC, in the above example, 15 days interest. So we trade one month's mortgage interest for less than one month HELOC's interest.
In practice, most people using Velocity Banking are paying more and earlier for the mortgage payment. Let’s separate the issues here. We are not here to talk about whether paying off loan earlier good or bad. If we want to pay off our loan earlier, we can achieve that even without using Velocity Banking.
So let’s discuss if we do not pay more each month, whether the Velocity Banking still worth it. For example, a mortgage’s monthly payment is $1000, with 3% interest. Each month we can ONLY get $1000 at the 15th of each month for the mortgage, NO MORE, and NO LESS. Then let's see whether it is worth it. If you know the concept of Velocity Banking, you'll know that the effect of the Velocity Banking is equivalent to pay one-time, one month's payment as capital payment earlier. In the above example, it means you pay $1000 capital off earlier. That will save you $30 interest per year with 3% interest. However, you need to pay the interest for the HELOC, in the above example, since we receive the money in 15th of the month that means we need to pay 15 days’ interest for HELOC each month. If the HELOC’s interest is the same as mortgage rate as 3%, the HELOC’s interest will be $15 per year, so we saved $30 - $15 = $15 per year.
Of course, how much can we actually save depends on HELOC's interest, and which day we can receive our mortgage payment (in the above example we assume we can receive it in the 15 days of each month). We may even have loss if HELOC's interest is too high and the days we receive the mortgage payment are too late (at the end of each month). But the maximum we can save is $30 per year. So does it really worth it to save at maximum $30 per year with so much hustle. At least NOT to me!
Your traditional mortgage is based on a monthly amortization and your HELOC is calculated on a daily basis and is a revolving line of credit. That fact alone is the entire basis for any potential opportunities to save money and potentially pay down your mortgage faster. If my first sentence does not make things entirely clear as to why this might potentially save you money, then I would avoid attempting this. As an investment accountant who works with LP and Ltd's that utilize revolving LOC's based on daily calculations, the ways to make marginal improvements to your cash flow are quite obvious to me. But I'm not saying that I'm FOR velocity banking....just saying that's is the basic concept behind it. Personally, I don't think it's worth my time.