Using a HELOC to start investing and velocity banking

7 Replies

I am a new investor from Denver looking for my first deal (probably out of state). I don't have much in the way of personal funds to start investing, but I probably have around 75k available if I were to take out a HELOC. I would like to start the process of velocity banking simultaneously to pay off my mortgage quicker with less interest paid. Has anyone ever used this combined strategy of using a HELOC for both of these strategies? Any suggestions on how to find the right HELOC or a calculator that helps guide through the velocity banking process?

Thanks

Jesse Dickens 

@Jesse Dickens

This sounds like one of those black magic things where a HELOC magically pays off your mortgage in 5 years!!

Don't believe the hype. All it does is force you to make extra payments, but with the risk of a variable interest rate on your HELOC and the fact that they could call it due at anytime. I don't find it to be worth the risk when you could just pay extra when you are sure you have it that month.

There’s another thread talking about this that has 100+ posts and started a couple years ago but had posts recently. A pretty funny thread actually.

Originally posted by @Jesse Dickens :

I am a new investor from Denver looking for my first deal (probably out of state). I don't have much in the way of personal funds to start investing, but I probably have around 75k available if I were to take out a HELOC. I would like to start the process of velocity banking simultaneously to pay off my mortgage quicker with less interest paid. Has anyone ever used this combined strategy of using a HELOC for both of these strategies? Any suggestions on how to find the right HELOC or a calculator that helps guide through the velocity banking process?

Thanks

Jesse Dickens 

If you are attempting to keep some liquidity to continue to invest, do not use your HELOC to pay down your mortgage. You will just end up with trapped equity in the mortgage. You are much better off leaving your mortgage as is and using the rental cash flow to pay down the heloc balance and then using the heloc to invest again. Then just keep repeating this process over and over... your heloc is your flexible line of credit to invest with

@Andrew Postell take a look at the link that @Matt Rauer posted. It's a BP forum on this exact topic. They can explain it way better than I can, and its a really great debate. I still struggle with fully understanding the concept, but I've decided not to move forward with it. As suggested earlier, I will probably just use my HELOC to make investments that should yield a much greater return than the 4% interest on my mortgage.

Thanks guys!

I know this strategy *very well* because I've been doing it for years. The confusion all stems from people's inability to understand amortized interest. Keeping it very simple...think of time, balance, and interest rate or you will very quickly take the first wrong turn that leads to that crazy neighbor that shoots randomly at people who dare drive down his road.

The HELOC strategy is basically making extra principle payments on the debt and at the same time remaining liquid with your available equity. The 2nd part is why you have to jump through a few extra hoops. Forget everything you think you know about a percentage of return vs amortized interest, you will not even be in the same town let alone the ballpark. In an amortized loan you're just not paying 4% interest, you are paying 4% interest FOR 30 YEARS, front loaded. Let me give you real numbers to make it clear (use any amortization calculator that has the schedule attached)...a historical average of 6% interest on a 30 year loan of $200k. You make a $12k principal payment from the HELOC to the mortgage. With a $2k cash flow you will have paid the $12k completely off in 6 months. How much did you save on mortgage interest? $46,785.93 mortgage interest elimination! Plus 4 years of debt elimination (30 yrs - 4 yrs = 26 years of pending debt). The HELOC debt will have cost you $1,260 EVEN AT A 21% HELOC INTEREST RATE. It's all about the time, balance, and interest rate.

So what is your yield on that! My God, people will not listen to reason and are almost completely illiterate in financial matters. I blame the school system for not teaching people this and the banks and government for making fools out of the whole lot of us.

This technique really is the biggest no brainer in history. I have many more advanced techniques to freely give to anyone without cost, without selling anything to anyone. I just want to help people.

@Jesse Dickens

@Rick Hart is right, however make sure you understand your monthly cash flow first, have a good credit score and have the discipline required to play with your HELOC.

Velocity Banking works if you know what you are doing.

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