Velocity Banking Strategy
Member since 2018 · 1 post · 0 votes
I'm interested in implementing the velocity banking startegy to pay down debt quickly. However, I don't own a home or any property for that matter. Can I set up an LLC for my business and build up my business credit allowance and utilize it to pay off my personal debts? I would assume that any payment from the business on my personal debt would be considered as a form of income that would be taxed. Other than utilizing my business line of credit, are there any other ways I can implement this strategy without home ownership?
Makes perfect sense. You’re just shifting money around using a line of credit to “chunk” payments towards the principal of the debt which eliminates interest. There’s more to it than just “making extra payments.” Once you make extra payments that money is gone as opposed to rebuilding a revolving line of credit to chunk towards the debt again and again.
Messaged you Richard :)
Can you message me too Renee? :D
No, you won’t get a line of credit.....you don’t need one, you just pay extra toward your debts.. There is no magic to the “heloc system”......you borrow money to payExtra on your debts, then you pay the heloc back......same thing as just paying extra on your debts without it.....bottom line, you’re just paying extra every month out of your pocket, either way.
No, you won’t get a line of credit.....you don’t need one, you just pay extra toward your debts.. There is no magic to the “heloc system”......you borrow money to payExtra on your debts, then you pay the heloc back......same thing as just paying extra on your debts without it.....bottom line, you’re just paying extra every month out of your pocket, either way.
I'm deep into reading all these threads about "velocity banking" and I can't help but wonder if this is how people end up in cults. It makes no sense.
Makes perfect sense. You’re just shifting money around using a line of credit to “chunk” payments towards the principal of the debt which eliminates interest. There’s more to it than just “making extra payments.” Once you make extra payments that money is gone as opposed to rebuilding a revolving line of credit to chunk towards the debt again and again.
In Search Of: An an aggregate software program recommendation for velocity banking please.
We just bought into the idea that we can get a HELOC paid off quicker by putting all incomes against it and allowing the 5% interest to be saved by 'preventing' it's accumulation (as it's calculated daily on the balance). My current financial software (mvelopes) is ineffective in handling the transactions efficiently. I would greatly appreciate a recommendation to replace what I'm using that will allow me to track my first real estate investment. Thanks in advance~!
@Richard Heineman personal line of credit
@Wayne Brooks that’s not true. You’re missing many factors here to weigh it. You need to know the type of interest and the percentage. Without both, you cannot accurately gauge if it’s worth it.
@Brandon Hausauer you need to research it more if it makes no sense. The key difference is the difference between amortized and simple interest. That is the key
Why not buy into a small multi-family and save all the monthly profit for 12 months, then take the entire amount and pay it towards the debts, then repeat again the next year? You'd own an investment property, build equity, get tax breaks and pay down your personal debts.
@Account Closed I understand the concept and amortization quite well. An “amortized” loan Is a simple interest loan. The interest portion you pay each month is simply the outstanding balance at that moment times 1/12th of the annual interest rate....exactly the same way a heloc is calculated.
The savings boil down to paying extra on the mortgage balance, which decreases the interest owed each month, thus increasing the portion of the fixed payment that goes goes toward principal (“moving ahead in the amortization schedule”).....it doesn’t really matter if you pay the loan down directly or use a heloc to do it and then pay that heloc back.....it’s still the same “extra” money out of your pocket.
One of the staunchest promoters of this, pitched mostly by the Renautus guys, finally admitted the result is the same, it’s just that you have a heloc available for emergencies/unexpected expenses. If that’s a concern, then just get a heloc, and not use it.
And yes I understand the “comfort” in having a house paid off....I refi’d my personal residence a couple of years after buying it for a better rate and put it on a 10 year note, I just wanted it paid off when I hit 55. But, to be clear.....the Yield on paying down a mortgage is Exactly whatever the underlying loan interest is.....no more, no less.
@Wayne Brooks amortized is not the same thing as simple interest in any way shape or form. You can look at an amortization schedule, look at how much interest you will save by chunking off a huge sum with a heloc, and calculate the interest you’d pay in a heloc. Your first several months in an amortized loan are mostly interest. Several hundred dollars. A 100,000 house has you paying 3-5000 a year in interest. A 10% heloc costs a few hundred a year.
@Account Closed Not at all....
On an amortized Loan, $100k, 6%, interest month 1 would be $500.
On a heloc, balance $100k, 6%, interest for the month, wait for it......$500.
A Real “velocity” example:
Same loan as above, month 1 you pay $10k on the mtg using the heloc, both 6%:
Mtg balance $90k, interest payment portion for that month...$450 (month 69)
Heloc balance $10k, 6%, interest payment for that month.......$ 50
TOTAL. $500 (what a surprise)
There is no “inherent magic” in using the heloc.....the benefit comes Only when you start paying Extra toward the principal, whether it be on the heloc or on the mtg. If you never pay any Principal down on the heloc, you never see any savings. You achieve the same “savings” by simply paying extra directly on the mtg.
@Wayne Brooks you obviously don’t understand the principle. You chunk it. You don’t put the whole thing toward the mortgage. But if you did, it goes by average daily balance. So if you put money towards your heloc every week (paycheck) or a lump sum (rental income) its lowers your average daily balance and you pay less than the full percentage for the full amount. Just like how you can’t just put 1000000 in the bank on the last day of the month and still get the full month of interest.
There are dozens of different calculators and spreadsheets. No need to rely on one persons fable of it. But hey. Stick to your way. The banks way. The way the bank wants you to think so they can reap the rewards.
@Wayne Brooks I’m sure Clayton Morris, multimillionaire real estate investor, has published a book and several videos of he and his wife telling how they love to use their heloc for this very purpose. And before you smartly retort it’s all to sell his book, I’m sure they don’t need the peanuts that the book gives them in income. So what’s the logic? Why would they do it? To get a kickback on all Helocs opened? Equally doubtful
@Account Closed Exactly......it’s that Extra money you’re putting toward the heloc (your pay check).....you can simply put toward the mtg instead.
One thing all your calculators ignore is that you are paying Extra Principle above your fixed mtg payment, which you could just pay toward the mtg.
If you think the “chunking it” works better, then enjoy.
@Wayne Brooks I’m sure Clayton Morris, multimillionaire real estate investor, has published a book and several videos of he and his wife telling how they love to use their heloc for this very purpose. And before you smartly retort it’s all to sell his book, I’m sure they don’t need the peanuts that the book gives them in income. So what’s the logic? Why would they do it? To get a kickback on all Helocs opened? Equally doubtful
The same Morris that destroyed an untold number of invenstors with terrible investments and vacant properties...or even just taking money foe new construction and delivering vacant lots?
@Wayne Brooks I’m sure Clayton Morris, multimillionaire real estate investor, has published a book and several videos of he and his wife telling how they love to use their heloc for this very purpose. And before you smartly retort it’s all to sell his book, I’m sure they don’t need the peanuts that the book gives them in income. So what’s the logic? Why would they do it? To get a kickback on all Helocs opened? Equally doubtful
Oh My God, if you’re using Clayton Morris as a recommendation.....I rest my case.
@Wayne Brooks I’m sure Clayton Morris, multimillionaire real estate investor, has published a book and several videos of he and his wife telling how they love to use their heloc for this very purpose. And before you smartly retort it’s all to sell his book, I’m sure they don’t need the peanuts that the book gives them in income. So what’s the logic? Why would they do it? To get a kickback on all Helocs opened? Equally doubtful
Oh My God, if you’re using Clayton Morris as a recommendation.....I rest my case.
It's just 4 walls and a roof, a house is a house... (Heavy sarcasm)
@wayne brooks
Amortization loan 100,000 @ 5% Month 1 - Interest $417 Principal $120
Now, if you used a $5,000 LOC to take a chunk out of the mortgage, paid FULLY TO PRINCIPLE, you'd reduce your 100k loan to 95k and save all that interest. Which is roughly 12k.
Now, a LOC with an APR of even 12%, is the ANNUAL percentage rate of 12%, which means its a 1% MONTHLY percentage rate. This is where you originally went wrong, (You calculated your 6% which is an APR of 72% which is illegal) So, what is 1% of the $5,000 we used to save $10,000 in interest? $50.
It cost you no EXTRA money. You owed 100k, then broke it into a 95k and 5k debt. I think you would even agree to that point. So you save $10,000 , which is over two years in interest, simply by making that one payment with your LOC. Even if it took you a year to pay that LOC, the MOST it would cost is $600 (50x12) But since you are putting your income into the LOC it brings it down each month.
I rest my case. -600>-12,000
You do not "pay extra". This is where it shows you do not understand the principle, and you should spend some more time actually learning the concept instead of dismissing that which you clearly do not understand. You put your money into the LOC yes, but that does not mean it stays there. You pay all your bills out of the LOC, and deposit all your money into it. Just like a checking account. If you need money for groceries, you pull it out. Need money for an emergency? You pull it out. Now, should you pay extra on your mortgage and run into an emergency, what are you going to do? Ask the bank for that extra $500 back?
And I'm sorry, I guess you are more successful that Clayton Morris. I did not realize I was talking to someone so rich. Your professional picture hid this from me.....
No, you won’t get a line of credit.....you don’t need one, you just pay extra toward your debts.. There is no magic to the “heloc system”......you borrow money to payExtra on your debts, then you pay the heloc back......same thing as just paying extra on your debts without it.....bottom line, you’re just paying extra every month out of your pocket, either way.
I'm deep into reading all these threads about "velocity banking" and I can't help but wonder if this is how people end up in cults. It makes no sense.
Basically, if you want to understand the strategy, ask yourself this question. If your current lender offered right now to refinance your mortgage (with no closing costs) to exactly what you have now EXCEPT that the loan also functions as a line of credit - meaning that you can put all of your income toward your mortgage, but still pay bills when they come due - would you do it?
To me, the answer is an obvious yes. By putting all of your income toward your mortgage (even temporarily) you are suppressing your average daily balance, which lowers the amount of interest you pay. And then any money you DON'T take out to pay bills automatically stays on your mortgage and helps you get out of debt faster.
The thing is, most lenders do not offer this type of setup, so to accomplish it you get a HELOC and put "chunks" of the mortgage on it to do the same thing. Opponents of the strategy say that you can just take whatever you have left over at the end of the month and put it on the mortgage, which accomplishes the second part of the strategy, but does nothing to lower your ADB throughout the month. The other way to think about it is that when you are paying your regular payments it takes around 2 years and $20,000 in interest to pay down $10,000 off of your loan, but when you put that same $10,000 on your HELOC it takes 6-10 months and under $1000 depending on your disposable income and the rate on the HELOC. I just think it's more efficient to be able to use all of your income toward your debt, but still have access to it when things come up.
People will tell you that putting all of your extra money toward your mortgage means you are not investing in stocks or rental properties, so you are paying opportunity costs, but then they will turn around and save their money for years to buy a property and not realize they are the ones paying opportunity costs by letting their money sit around. Extra money goes on my mortgage every single paycheck automatically, so there are no opportunity costs whatsoever and I'm getting a guaranteed return via interest savings. Anyway, hope this helps clarify. Have a good one.
@Account Closed I didn’t make a mistake in the math, I was using $100k to compare the monthly interest due on both a mtg and a heloc, at the same rate, for the same amount, to show you a mtg Is a simple interest loan.
You are missing two basic concepts:
1) you Are paying an extra $5k above and beyond your normal mtg payment when you pay down your $5k heloc Loan to $0, whether that be in one month or one year.....the $5k to pay off the heloc Principal balance came out of your pocket Above your normal mtg payment, where do you think it comes from?
2) yes, whatever you pay down extra on a mortgage balance, whether thru a heloc or by paying directly, you Will reduce your total payments over the life of the loan by a large multiple of that amount.....but again, the Yield/Return on that money is Exactly whatever the underlying interest rate on the mtg is.
And yes, a $5k extra payment on your loan above does eliminate the Last three years on your mtg, 27 years from now. If you do the math, $5k invested now at 5% would yield (pay you back) Exactly 3 years of $ 537/mo, 27 years from now.
BTW, in order to not “pay extra” out of your pocket, that means you’d never pay down your heloc balance, meaning you’re paying an extra $50/mo on the heloc interest, in addition to your monthly payment, for the next 27 years.....do the math, it works out the same, or more, as the payments you eliminated 27 years from now.
First, I would like to thank everyone for reviving a thread that should've died off months ago. There are other threads on this topic have been discussed ad nauseam. Please go there, read about the comments from your fellow cultists or anti-cultists as you so desire.
Second, to clarify - I fully understand how the math works with this. What I was commenting on was the fact that this "strategy" comes up again and again and most people just scream about how it works but can't explain how it does. It makes no sense for people to do this when most of the advocates don't even understand math. It's literally the same zeal you hear from cultists. If it works for you, great; but please don't force everyone to guzzle your Kool-Aid.
Third, the reality is that the risk of running aground is too great for most people. It is easier to simply make extra payments towards your mortgage and be done with it. Even if you go down the road of the math with your average daily balance and the effective rate on the HELOC, you're getting to the point of slicing hairs (reference: Pareto Principle or diminishing marginal returns, your choice). You're better off spending the time you would be managing this velocity banking "strategy" working more to get more income, finding deals, managing you properties, spending time with your kids, etc. Keep in mind that one mistake or a few days delay and you're going to be upside down and would've been better off taking the simple route of paying down your mortgage the traditional way.
Lastly, a reoccurring theme with velocity banking is false equivalencies (e.g. HELOCs that you can get the same terms as your mortgage don't exist, statements how VB caused a mortgage to be paid off in just a few years when really it was the extra principal payments, etc.). Something to be aware of...