HELOC for velocity banking

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HELOC for velocity banking

Giovanny Vizcarra
Member since 2019 · 15 posts · 3 votes

Hello!

I would like to ask for some input and helpful information, for using a Heloc as a means to paydown mortgages quicker.

I have 4 properties. 3 are rentals, 1 has an attached casita. And my 4th(primary) property

Will be getting a garage conversion for house hacking.

Total monthly cashflow after garage conversion, (which will be $700 monthly) will be 2600.

I have enough capital to pay off 1 of my properties which will increase my cashflow to $3600 monthly, but i think i would like to apply for a HELOC instead and use my capital to add monthly paydown plus any extra income that i bring home monthly. Ive run some numbers and at a 4% rate i have calculated that I can potentially have 2 of my properties completely paid off in 4.1 years. (That would be best case scenario. My question is what are the best banks out there for HELOCS? what is the usual cost of one?

Thanks

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Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
5y

@Giovanny Vizcarra

You are aware that velocity banking is just a way to force yourself to pay down extra principal? If you just paid down that principal directly, you will outperform the velocity banking model?

Also, with potential inflation increasing from money injected into circulation and mortgage rates currently at all time lows paying down principal is objectively one of the least efficient uses of your capital?

Providing after considering both of those considerations, velocity banking is still the right option for you... We paid less than $700 for our HELOC and it's through Elements FCU. A few years ago you could get 75% LTV for rate, 85% LTV for rate + 1%, and 95% LTV for rate plus 2%. Info's a little dated by now though. Circa Q4 2017

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  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Giovanny Vizcarra

    You are aware that velocity banking is just a way to force yourself to pay down extra principal? If you just paid down that principal directly, you will outperform the velocity banking model?

    Also, with potential inflation increasing from money injected into circulation and mortgage rates currently at all time lows paying down principal is objectively one of the least efficient uses of your capital?

    Providing after considering both of those considerations, velocity banking is still the right option for you... We paid less than $700 for our HELOC and it's through Elements FCU. A few years ago you could get 75% LTV for rate, 85% LTV for rate + 1%, and 95% LTV for rate plus 2%. Info's a little dated by now though. Circa Q4 2017

    3Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Todd Rasmussen

    Thank you for the reply! I highly appreicate it. What Im trying to achieve is the ability to pay down the properties as quick as possible with cashflow and extra income and still having the ability to have access to cash if a great deal on another property presents itself or having cash on hand imcase of a set back. Also think heloc is great vs having to do a cash out/refi later and pay crazy closing costs on anyone of the properties. I do believe at some point the higher interest on helocs will even out with saving money on refis, but i dont plan on using much of the helocs. As i will only want to use anywhere from 1k-5k at any given time before i pay it off.

    I dont know, im just excited to get started and its difficult for me to explain it all thru txt!

    0Reply
  • Kevin Romines
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    The key to Velocity Banking is that you stop banking in your normal bank or credit union and start backing (all deposits) into the HELOC. Even though the HELOC has a larger interest rate than a current fixed rate, it also uses simple interest on a daily balance.

    So because you are now banking in the HELOC, you pay less interest because all your monthly deposits go into the HELOC and you have lower daily balances than you would on a fixed rate mortgage, all while still having access to the line of credit up to your limit. It is a great way to go, and it can out perform a lower fixed rate mortgage if used correctly.

    I hope that helps?

    2Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Kevin Romines

    Hello kevin! Thank you for the information. I have learned the concept on how the HELOC works, even tho it had taken me quite a while to understand that I would be using it as a savings/checking account. Would you happen to know if banks are pretty comparable or can be widely different when it comes to terms, rates? Are some banks better than others. For example using credit unions vs commercial banks? So far ive only called Bank of america

    Any info helps!

    Thanks

    0Reply
  • Kevin Romines
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    I just sent you a PM with one of the largest players of that loan type. Call them and get all loan details with them. 

    1Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    5y

    @Todd Rasmussen makes for good points. I took a look at it and I think at this time I am not going to go down that road, but a resource that helped me is "The Kwak Brothers". They have some good Youtube content on the subject and also offer a free 'calculator' that helps you figure potential savings. 

    That calculator helped me figure out in *my* situation I will just stick with paying a lot of extra principal when I can and keep my HELOC on the side unused but still there for emergencies or opportunities. It *seems* to me (not sure if this is 100% accurate" that a big part of paying things off faster is using 'extra cash flow' to pay down the principal. I am *already* doing that, and am pretty good with a mortgage calculator to know how to adjust things when/if needed.

    [email protected]608-524-4899
    1Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Giovanny Vizcarra:

    @Todd Rasmussen

    Thank you for the reply! I highly appreicate it. What Im trying to achieve is the ability to pay down the properties as quick as possible with cashflow and extra income and still having the ability to have access to cash if a great deal on another property presents itself or having cash on hand imcase of a set back. Also think heloc is great vs having to do a cash out/refi later and pay crazy closing costs on anyone of the properties. I do believe at some point the higher interest on helocs will even out with saving money on refis, but i dont plan on using much of the helocs. As i will only want to use anywhere from 1k-5k at any given time before i pay it off.

    I dont know, im just excited to get started and its difficult for me to explain it all thru txt!

    Happy to weigh in! Have you calculated the opportunity cost of paying extra principal down on your mortgage and used that number in your decision to pay down your debt?

    0Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    5y

    @Todd Rasmussen that is a GREAT point about the Opportunity Cost of doing that. In *my* case I am only interested in doing this on my personal home mostly for 'peace of mind' and my goal is to have it done in 10-15 years when I hope to retire from my 'day job', and it would be nice not to have that coming out of our cash flow at that time.

    I dont have any interest in paying down my investment properties due to exactly what you are saying about opportunity cost of those funds. Part of my plan is to use excess cash flow from all of them and use that for down payment on a few more. Then about the time of retirement I plan to start using that cash flow in a "payoff snowball" and putting it all towards the smallest mortgage. This again would add to peace of mind, and open up the option to sell of some of them using Owner Financing since they would be free and clear.

    [email protected]608-524-4899
    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y

    Man, this thing is like a bad penny. Although I never quite understood why a penny would be bad in the first place. Every time I think it's dead someone asks about it. 

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    1Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Daniel Dietz:

    @Todd Rasmussen that is a GREAT point about the Opportunity Cost of doing that. In *my* case I am only interested in doing this on my personal home mostly for 'peace of mind' and my goal is to have it done in 10-15 years when I hope to retire from my 'day job', and it would be nice not to have that coming out of our cash flow at that time.

    I dont have any interest in paying down my investment properties due to exactly what you are saying about opportunity cost of those funds. Part of my plan is to use excess cash flow from all of them and use that for down payment on a few more. Then about the time of retirement I plan to start using that cash flow in a "payoff snowball" and putting it all towards the smallest mortgage. This again would add to peace of mind, and open up the option to sell of some of them using Owner Financing since they would be free and clear.

    Nice! Sounds like you are getting to a very exciting time. I'm on the growth trajectory and figure in a decade or so we'll probably peak and start pay down ourselves.

    0Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @JD Martin:

    Man, this thing is like a bad penny. Although I never quite understood why a penny would be bad in the first place. Every time I think it's dead someone asks about it. 

     Right? Don't worry, we'll get him there.

    0Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Justin Phillips

    Thanks! Id like to know what a ZBA and who you used for the loan? A few members here on BP have helped me out with finding good lenders and thats really what im after. im trying to find the best lenders that are most flexible with competitive rates to terms

    Your key points is really how im trying to work it really. I want to increase my cashflow by paying off the first property with capital ($153k) but still having the Heloc in place on that property in case i need the funds for whatever reason. But my total monthly cashflow on all properties would be $3600 plus $2000 from earned income will put me at $5600per month that i can then send to the second property. Ill save all that interest on first property which would be right above 180kin savings if i were to take it to the end of the terms. Plus the savings on interest on the second property. In case an oppurtunity arises to purchase another property, My Heloc will be just waiting there with roughly 270k because that is my 80% LTV on first property. (I know this number could be lower) But also its there in case of a

    set back. I owe 200k on my second property. Which running an ammortization calculator and total doing absolute best case scenario, I can have my second one paid off by oct 2023. Unless i get another deal anytime between now and then where i have to change my strategy and purchase another home, I lose my job, or start having tenant issues.

    0Reply
  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    5y

    @Giovanny Vizcarra
    That's the right way to think about it! And to expand on your point about flexibility, when paying interest-only you're much less exposed in the case something goes wrong. For example, my wife and I's monthly interest cost is about half of the P+I of our previous mortgage. So if we have a tenant wreck our rental, we have time to get it repaired and ready to rent again. We won't feel rushed to pick a tenant due to our mortgage payment staring us in the eye every month. We just have a interest only cost that's added to the balance once a month. As long as there's room on our line, we don't need to make any deposits or payments. 

    0Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Justin Phillips:

    @Giovanny Vizcarra I would highly recommend looking at a First Position HELOC loan that's tied to a ZBA (Zero Balance Sweep account). My wife and I got on one, and I liked the concept so much that I left my job in medical sales to join a broker that specializes in them.

    There's really 3 problems with making extra payments on a traditional mortgage, or using a HELOC to pay down a traditional mortgage:

    1. It never changes your payment, meaning it doesn’t get any cheaper month over month.

    2. You’re still going to be paying interest first.

    3. You won’t have access to your equity without selling or a ReFi.

    On this loan, the opposite of all three is true:

    1. With every dollar you put in, your cost just got cheaper next month.

    2. Every normal banking deposit you make is swept directly towards the line.

    3. You can access that money anytime to pay bills or make additional investments.

    It’s a great way to put idle funds to work. You can also use it to snowball debt. The best part, each property purchased/paid off using the line pays off faster than the last with the additional cash flow.

     What are the interest rates compared to 30 year fixed products?

    0Reply
  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    5y

    @Todd Rasmussen The rate is a little higher than a 30 year fixed, it's Libor + 3.75%, so the current rate is 3.86%. It adjusts monthly. Our clients don't necessarily care though, because when the payoff is so condensed, it's not an interest rate sensitive loan. So for those who qualify, there won't be much of a difference in payoff between the current low rates and when they start to rise.
    95% of our clients ReFi from a lower interest rate loan. That's because over 30 years, low interest rate doesn't equal low interest cost.

    1Reply
  • Ben Grubb
    Rental Property Investor · Denver, CO · Member since 2021 · 22 posts · 11 votes
    5y

    @Giovanny Vizcarra Velocity banking requires excess funds each month. Ie you have $3000 in income ans $2500 in expenses pass thru your Heloc. If you do the math and just pay that $500 directly to principal you get the same result without the hassle. It sounds good on paper, but you are really just paying more principal each month. You may save a few dollars ans months using Heloc but it is not materially different ans less hassle.

    0Reply
  • Gabriel Cardus
    Rental Property Investor · Member since 2019 · 35 posts · 5 votes
    5y

    @Giovanny Vizcarra

    You should take a look at Harj Gil's HELOC strategy. He has a book he authored "How to own your home years sooner without making extra interest payments". It basically teaches you how to use your HELOC like a checking account. It is a very simple read, helps you understand how simple interest works, how to help push your principle down daily to help save you money monthly. Really powerful information once you understand the strategy. Helps you build equity fast leveraging other people's money.

    1Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Ben Grubb

    Hello Ben. Yes of course. I am currenrly cashflowing $2000 per month from my properties but will soon be cashflowing $3600 by paying one of the properties off and will be adding an additional $2000 per month from my own earned income thats left over after my expenses.

    I will be getting a HELOC on the property that i am paying off with capital, but will not draw any money on it. I will have the HELOC on idle waiting in case i need it for any set back or if i find a deal on another property. Ive never done a HELOC and thats the reason for the Post. But after help from other on clarifying certain terms and costs etc. I will be moving forward with it.

    Thanks

    0Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Gabriel Cardus

    Yes thanks, i figured out the strategy. Just needed some feedback on a couple different paths to take. And reqlly i was trying to get info on what banks do Helocs and types of terms and costs. Ive gotten reqlly good infoation from others here on BP. It will be my first time doing a HELOC but i see it as a no brainer, and am really excited for it. If you see a few of my previous replies on here youll find what my strategy on using it will be. Let me know what you think.

    Thanks!

    0Reply
  • Gabriel Cardus
    Rental Property Investor · Member since 2019 · 35 posts · 5 votes
    5y

    @Giovanny Vizcarra

    I see your strategy and understand. As far as banks are concerned I always like local banks because they understand your local market and sometimes offer flexible draw periods.

    I'm not sure if you are indicating you're aware of the HELOC payment strategy by manipulating the simple interest, but it is basically putting your HELOC on steroids to help you pay it down quicker and build equity faster.

    Good luck, you’re where most of us want to be.

    0Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Gabriel Cardus

    Ok, I will take a look ar Harj Gils strategy.

    Ill let you know my thoughts....

    Thanks,

    0Reply
  • Giovanny Vizcarra
    OP
    Member since 2019 · 15 posts · 3 votes
    5y

    @Gabriel Cardus

    I just looked it up!

    I actually saw his video a few days ago. So your talking about using a second position HELOC which can be little to no cost, and using the credit card?

    0Reply
  • Gabriel Cardus
    Rental Property Investor · Member since 2019 · 35 posts · 5 votes
    5y

    @Giovanny Vizcarra

    Hey I'm sorry I missed this message. It's a credit line, usually no closing costs and basically you open it up as a second mortgage. You use the banks available moneys (calculated portions) to make principle only payments to get ahead of the amortized cycle. To pay that money back, you use the HELOC like a checking account to lower the average balance for the month and apply more towards principle. When you have to pay bills, you transfer from the HELOC back into your checking. The percentage rate your saving daily on the moneys deposited in your HELOC is an instant return on your money because money saved is money earned there.

    1Reply
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