Kansas City, MO · Member since 2020 · 35 posts · 10 votes
Can someone explain the velocity banking strategy? I have seen the concept explained as a way to use a HELOC to pay principle only checks to your mortgage as a way to pay off a loan in an extremely short amount of time. Also, could you add the pros and cons of using a strategy like this?
IMO, it's a gimmick. Paying off a low interest loan faster just shows that you have no idea how to find a higher yielding investment. Spend your energy on finding & creating opportunities to create wealth ,not playing games with HELOC's and mortgages.
IMO, it's a gimmick. Paying off a low interest loan faster just shows that you have no idea how to find a higher yielding investment. Spend your energy on finding & creating opportunities to create wealth ,not playing games with HELOC's and mortgages.
As simple as that is to do, it's not easily done but you're absolutely correct Ellis. Being debt free is not necessarily the answer but always payoff higher interest first. Another simple concept not always followed either. If, your ratios are high, payoff revolving debt first because lender will normally make your payment 5% of the revolving balance. So ultimately you need to focus on your goal. Maybe it to qualify for a loan or maybe it's to invest. Long term investing or flipping.
understanding at the time was that it's a payment cycle play— i.e. where the money you use from the HELOC was interest free, or significantly less costly than, the the cost of the 1st position lien you are looking to extinguish. Anyone have a similar take on the concept?
Check out this long (300+ response) thread and this slightly less long (150+ responses) thread on the topic. Velocity banking has been discussed, dissected, and debated to DEATH in both of them, so no need to do it again here.
Short answer: multiple people have done the math and, if the HELOC interest rate is the same or higher than you fixed rate mortgage, velocity banking does nothing to save you money, the act of making extra principle payments is what saves money.
Good Luck and make sure you have a beer before you read either: things get spicy.
Check out this long (300+ response) thread and this slightly less long (150+ responses) thread on the topic. Velocity banking has been discussed, dissected, and debated to DEATH in both of them, so no need to do it again here.
Short answer: multiple people have done the math and, if the HELOC interest rate is the same or higher than you fixed rate mortgage, velocity banking does nothing to save you money, the act of making extra principle payments is what saves money.
Good Luck and make sure you have a beer before you read either: things get spicy.
You are right on point. Most people that are advocates of The"Velocity Gimmick" have no education about the time value money. Their typical response is " Look at all the interest I will save over the life of the loan". Let's face it they gave it a fancy name for marketing purposes to get attention. It should be name "Velocity Ignorance" instead.
The concept is to eliminate the massive amount of compounded interest. If you took a loan out for $100,000 at 5% for 30 years you would pay $93,000 in compounded interest. If you paid it off in 5 years your interest is $24,000. In theory you saved $69,000 dollars. The 5% interest in reality is almost 93% not 5%.
You need to balance the extra money you put towards paying the debt down versus could you have made a better return in the long run. Could your equity/profits have been better if you had invested it in something else.
It’s a choice, I agree with @Account Closed I would use this concept to pay off high interest credit cards first before I conducted an analysis on where to spend my money or invest it.
@Kenneth Garrett There is no “compounded interest” in a mtg loan.....it is simple interest, just like a heloc...you pay interest for that preceding month based solely on the principal balance of your loan, period.
Mortgages are based on amortized interest which is not the same as simple interest. When you look at how much interest you pay or as investors are tenants are paying it’s a giant number. Look at an amortization schedule. Simple interest would be much less.
Please, for the sake of all parties involved, scroll up to the post a made a few days ago, click on the links, read through those threads. If you still hold the idea that "The 5% interest in reality is almost 93% not 5%." Then come on back and post again in this thread.
@Kenneth Garrett There is no such thing as “amortized interest”. A mtg loan, just a heloc, is pure simple interest.....interest owed for that month is purely the interest rate applied to the loan balance.
The reason one pays such a huge amount in interest on a 30 year loan is simply that....you don’t pay all the principle back fully for 30 years, so you are paying interest on a steadily declining balance for 30 years.
Yes, I know what an amortization schedule looks like.
Why don’t you compare a 30 year $100k with a heloc at the same rate.....make the same exact payments per month on heloc as called for in the 30 year loan.....you will find the heloc takes Exactly the same 360 monthly payments.
They both calculate interest each month Exactly the same.
Can someone explain the velocity banking strategy? I have seen the concept explained as a way to use a HELOC to pay principle only checks to your mortgage as a way to pay off a loan in an extremely short amount of time. Also, could you add the pros and cons of using a strategy like this?
People always treat velocity banking like it's voodoo or something, but it's really pretty simple.
1. Paying additional principal toward your mortgage saves you on interest. Everyone knows this, but most people don't have a ton of money lying around to do it. Even at 4% interest you are typically paying for your house and then another 2/3rds of a house if you pay all the interest.
2. If you don't have $10K lying around, you can take it from a HELOC and put it on the mortgage. That $10K part of your mortgage typically costs around $20K in interest and 2 years to pay down on the mortgage. Look at an amortization schedule and just add up all the interest to get from $200K to $190K (example) on your loan. If you're toward the beginning of your loan, the interest cost and time it takes to pay down are ridiculous. Now here's the key: If you move that same $10K to your HELOC and put all of your extra income toward it, it will take around $1-$2K and around 6-10 months to pay down (depending on your other expenses, etc.).
That's really it. Although it's only a $10K chunk of your mortgage, it "costs" $20K to pay down, because you're also paying interest from the rest of the loan. By isolating it on the HELOC, you're able to pay it down a lot more efficiently. Then, once you pay it down you repeat the process - take another $10K chunk over to the HELOC and pay it down.
I think the main thing people don't understand is that the interest on your mortgage is accrued over time, but it's not OWED, it's SCHEDULED. So, think about it like this. You can look at your amo schedule right now and see how much interest you will pay if you stick to that schedule, but if you win the lottery and pay off the balance tomorrow, you won't pay that interest. You skip / eliminate it, because you paid it off before it could actually accrue, ie. before you actually owe it. In other words, when it's still "scheduled", it's hypothetical and you can "unschedule" it by paying it off early. This works whether you win the lotto and pay off the whole thing or whether you pay it off early in chunks (of your own money or from the HELOC).
Hope this helps. Most people can't get it and blow it off as voodoo, which is unfortunate. They think that the $10K is the same whether it's on the mortgage or the HELOC, but as I explained the cost and time to pay it off are very different depending on how you do it. This strategy is just a more efficient way to pay it down if you don't have the money lying around. Later!
Check out this long (300+ response) thread and this slightly less long (150+ responses) thread on the topic. Velocity banking has been discussed, dissected, and debated to DEATH in both of them, so no need to do it again here.
Short answer: multiple people have done the math and, if the HELOC interest rate is the same or higher than you fixed rate mortgage, velocity banking does nothing to save you money, the act of making extra principle payments is what saves money.
Good Luck and make sure you have a beer before you read either: things get spicy.
You are right on point. Most people that are advocates of The"Velocity Gimmick" have no education about the time value money. Their typical response is " Look at all the interest I will save over the life of the loan". Let's face it they gave it a fancy name for marketing purposes to get attention. It should be name "Velocity Ignorance" instead.
It's unfortunate, everyone talks about the time value of money and comparing the velocity strategy to an "investment", but that's not the conversation at all. If the question was, "What should I do with this $10-$20K I have sitting around?", then obviously the answer is whatever gets the best return with acceptable risk. But that's not the question.
The real question is, "What are your checking account funds doing for you right now?". Of course, the answer is nothing, whereas I'm using my income to keep my interest costs down until my bills come in. See, if you're asking the wrong questions and using the wrong premise then you're going to get the wrong answers. I've been able to put an extra $60K toward my mortgage in under 3 years and it wasn't just lying around in my bank account nor did I scrimp and save. My wife's spending habits are pretty gnarly, tbh. The simple fact is, this is a way to put extra money toward your mortgage balance without accumulating it first. You're just leveraging the modest amount that's in your checking account and a different way to pay to save on interest.
I have a savings account, stocks, rentals, etc., too, but my checking funds are working for me and I'm reasonably sure yours aren't, so that's where you should be applying that time value of money question. What's the time value of money that's just sitting there every month, right?