I searched for Velocity Banking but did not get anything to return except for some lenders using that name. I just was introduced to this strategy this week and was curious if anyone has done it and what their experience with it was. If yuo don't know, the basic concept is to use a line of credit from the bank and use it like a checking account so you put yout income into it but get a LOC for like $10k, add in your income for that month, and use the $10k to pay the principal, and then pay your other expenses from that account and as long as you are spending less than what is going in, you build that LOC back up again so you are able to pay back the $10k LOC and then use it again to pay toward the principal. So if you save $1k each month, then every 10 months you can use it again or get an increased LOC and use a larger amount. Doing this strategy gets a 30 yr loan paid off in about 7 years and saved tons of interest. The LOC calculates interest on an average daily balance, so as you have money going into it each month, you are creating less of an amount to charge interest for. So over the course of a year, for that $10k LOC, assuming $4k income and $3k expenses, for a $250k mortgage at 5.25%, you pay about $13k in interest on the mortgage payments (first year of mortgage) vs only a few hundred dollars on the LOC. The only down-side I can see is opportunity cost. That money that you are saving each month could be deployed to purchase other properties rather than helping to pay off any specific loan. But if you have enough other sources of income and strictly use the rental income for any given property to put back into its own LOC, then theoretically, you can have full 100% cash flowing properties in 7-8 years, depending on how much you are saving each month. You could even use it for your primary residence. I just bought my first 4 plex this week, literally closed the same day I was shown this strategy, and it blew my mind. I want to use it with this property since it will be cash flowing about $700/mo and if I can get it paid off much sooner and save a lot of money in interest, that would be awesome.

What you have to remember with this Velocity banking stuff is that it really isn't this golden goose brilliant idea that some people make it out to be. If it was, everyone would be doing it. It's also the reason why smart people can't understand what is so "brilliant" about it, because it isn't brilliant or that helpful. People advertise it as a way to pay off a mortgage in 7 years etc blah blah blah it all sounds good to the ill informed or financial illiterate, but in all honesty, you could actually do that with any mortgage you want, you just have to be disciplined. The Velocity banking is more of a way to force you to diligently pay something off quickly. Another trick they like to talk about is how much interest it saves you, they typically show you how much interest you would pay over 30 years on a mortgage and take that entire interest amount as a % of the loan or house value, which is not a true % interest you are paying lol. And of course if you pay off a house in 7 years, you "save" a lot in interest, but you can do the same by paying off a mortgage in 7 years conventionally (albeit you would still pay a little more interest). This Velocity banking is more like one of those credit card hacking people where they have a slightly better rewards package on their credit card, sure they make a few bucks more, but the effort and time it takes to do it is not worth it to some people. Yes the method is probably slightly better than just using a conventional way of paying, but it's not absurdly better or genius. This is why it's so hard to try and understand why it's so much better, it's just not. Trust me, I'm a CPA and work in corporate finance and I've sat through a demonstration on this. You make a very good point about opportunity cost with the HELOC and it's a huge detractor from this method. Why would you seriously care to pay down a 4-5% mortgage quickly if you are an investor and can earn 8-20% on your money. I posed this same question to the person on stage in a 40 person presentation on Velocity method and the presenter gave some ridiculous response that didn't make any sense. I'm not saying this is necessarily a bad idea or a scam, but rather not some crazy good thing. The benefit from a HELOC is that it allows you to front the payment for a month, which lowers the average amount you owe on your loan throughout the month, and thus the interest you pay is lower, whereas if you didn't have the HELOC, you would have to wait a month to see that decrease in interest. They then say to take that interest savings and put it against your mortgage again and keep doing that and you have it paid off in 7 years. Ok sure, why would I want to do that if my mortgage rate is 4.2% lol, why not take that savings and invest it. They target peoples emotions "pay off your mortgage in 7 years WOW!!!" when in reality it's probably not the smartest financial advice.

@Don Spafford @David Dachtera Run the numbers people!!! My head is spinning and my brain is mad. Original home mortgages Pre-1934 were on average 7 year loans. The payments were interest only until at the end of 7 years you made a balloon payment of the entire principle. Most homes were foreclosed on especially when the great depression hit. In response, the amortized loan was created. What the amortization does is say you give me the length of time you want to borrow this money and I will even out the payments so you will know what is owed for the next 15 or 30 years. Let us not forget that at the beginning of the loan you are borrowing a larger amount of money than you are at the end of the loan. They charge you so much interest at the beginning because you have a huge principal amount out. You pay the same APR the entire time of the loan. The amortization part is that they adjust your principal payment so you know you can afford the payment and so it will stay the same. You can't be mad that a bank has given you $300,000 and wants interest on that entire amount. How else would you have them do it? That also means that as you pay the principle down you will pay less in interest, because the bank has less money out. I guess they could amortize the loan so you pay more principle up front and then you are upside down on interest at the end of the loan. That is what would be atrocious and a crime against math. Don't compare percentage of interest paid with interest rate. (My brain is getting mad.) Yes, you pay 95% interest when you borrow 300,000 over 30 years, but that is not the rate of interest. That is the total amount of interest we pay divided by the principal. We use APR so we can compare apples to apples. It is a standard. That is like if I were to buy $5 in bananas, and $20 in chocolate then say taxes on bananas is only 4% while taxes on a chocolate is 80%. Is that true? Well, all the food is taxed at 4%, but if I take the total amount of taxes paid $1 and $.80 is for the chocolate, then 80% of my taxes go to chocolate. You can't compare APR to 30 years of interest paid turned into a percentage of the principal. They are not the same thing. This is the smoke and mirrors. I have seen a guy tell someone with a 15 year loan at 5% interest to trade that in for an 11% heloc. Run the numbers, people. If you pay the same extra payments on both loans no matter how you cut it, you will pay more for the 11% interest loan, even with simple interest. The magic is in the extra cash. They say it is in the simple interest (I have also heard simple interest compared to amortized interest, which is not a type of interest, it is a type of loan) that holds the magic. It is not. Run the numbers. When I say run the numbers, I mean pull out an excel sheet and see what happens in your personal scenario. Look at your loan terms. The difference in interest type and APR only slightly accelerates the pay off. The huge payoff occurs with the cash. You still have to pay the principal down. It doesn't go away without cash. In any scenario where you pay $200,000 off in 7 years means (200,000/84) you need to be paying $2080 in principal plus the interest, be it 5% or 11% calculated according to your loan terms. So, if you have a $1500 mortgage payment and you think there is some magic that will pay that off without adding more cash to that payment, you are up in the night. Notice, in the scenarios given you have $4000 in income and $3000 in living expenses. Where do you think the extra $1000 is going? I must say another part of the magic is just refinancing. You are refinancing your other debt to have more cash to pay off principle. The ones that are best helped by this strategy are those with high interest debt. $20,000 in Credit cards and car loans at 15% refinanced at 10% can save you about $100 in monthly interest, which can then be added to your principal payoff. Even then, cash is king. That extra $1000 is still doing most of the work. Another note: You are not saving $1000 a month. $10,000 at 5.25% is only $50 a month in interest. No matter how you cut it, even if you borrowed that $10,000 at 0% interest, the most it would save you is $50 a month. The $1000 is the $1000 extra from your paycheck that you aren’t using ($4000 paycheck and $3000 in expenses).

@Don Spafford, @Ned Carey makes a good point. The whole point of debt acceleration, "Sweep Strategy", "Velocity Banking", or whatever you want to call it is NOT to reduce the principal paid back. It's to reduce the amount of interest you pay over the life of the loan. For example: $200K at 5% for 30 years ... Initially, your payments are mostly interest. Making only the scheduled payment, that doesn't turn around until roughly the 195th payment (16-1/4 years - past the half-way point in the life of the loan). By that point, the total of payments is already in excess of the original principal balance - roughly $202K. By the end of 30 years, the interest amounts to nearly $187K, meaning it's a 93.5% loan, not 5%. Amazing what compound interest can do, eh? By accelerating that to the tune of an additional $15K of principal per year (if you can manage it), the payoff comes closer to the 10 year mark and the total interest paid is closer to $52K or 25% of the initial loan balance. Big improvement.

Oh, how misinformed the people on this thread are! Don, the presentation you sat through might not have effectively demonstrated this strategy. Because it absolutely does work, and if you understand the difference between simple interest and compound interest, it will make more sense. I've been in the Mortgage business for over 15 years and I understand this strategy. NO, you don't have to be more disciplined. It's all about a paradigm shift. We have been brainwashed into thinking the traditional way of banking and the traditional mortgage is normal and acceptable. Everyone is most interested in obtaining the lowest rate. The velocity banking strategy is so much better. You can pay your 5-6 yr auto loan off in 5-6 months. The 30 yr mortgage off in about 7 years. It's not about making extra payments. What happens when you make extra payments on your mortgage? That money is gone. Unless you refinance. You can't swipe your mortgage to pay for gas or groceries if you need it... And yes, there is an education that goes along with it. You can do it for $1997, which by the way, is 100% tax deductible. It's a business write off. It's funny, people are quite alright paying around 3% in closing costs on a traditional mortgage, but balk about the cost of the education that helps you save HUNDREDS OF THOUSANDS OF DOLLARS! AND, once you have your debt paid off, all of those payments equal 100% cash flow. Plus you still have that line of credit...what do you do with it? YOU USE IT TO BUY INVESTMENT PROPERTIES!!! Any of you please feel free to contact me and I would be happy to help you understand it and make this strategy work for you!

@Don Spafford this is not a new strategy although it may be a new name for it. At the time I first heard about it, it cost $3,000 for the software to tell you when and where to move the money. At the time it was also a multi level marketing product. What they don't tell you is to pay off a 100K mortgage in 7 years you still have to pay at least 100K. There is no magic bullet that makes the debt go away. All their demonstrations assume you make substantially more than you need to live off of, and use all of that extra money to pay down the mortgage. You can pay more towards your mortgage every month without anyone's help.

You can learn how to do this for free if you just ask and are open to learning something. It works and I have done it. I share it with any and all who will listen, But I dont charge any one.

@Don Spafford, It's actually taught as part of basic financial education in some countries - not the U.S.

@Don Spafford Someone asked the question at some point in the threat and I did not see an answer. There is a lot of good information here but also a good amount of confusion - probably unintentionally. For me, I try to keep it as simple as possible. If I get a regular 30 year mortgage for $100K, the bank/lender gives me an amortization schedule that tells me exactly what my interest and mortgage payments will be each month for the whole 30 years. It also discloses to me that I will have paid close to $200K if you add all my payment together for the whole time. Since I owe $100K to begin with, I pay the another almost $100k in interest. I will have to pay about $535/month. Let's say I have other expenses to live, car , etc. of about $1000/month, the bank will probably want me to make about 3000/month to be comfortable to give me the mortgage. If I do the exact same thing with a $100K HELOC in 1st lien position for the same house, the same monthly expenses, and instead of 5% interest rate I assume 6% interest rate, I will be done paying in 7 years. Many people here will say that I am paying an extra each month into the HELOC - yes that is true. But my interest is also calculated every day and not once when I get the mortgage. Every time I reduce the balance, it is calculated and adjusted, so more of my payment goes towards principle and less to interest. My lifestyle does not change., All payment remain the same - assuming I am disciplined. If you want to optimize even more, you do all your monthly payments using a credit card and you pay it off before the credit card payment is due. The credit card company is basically giving you the money for your payments for free during the month if you pay them when the statement arrives using a check from your HELOC account. The last and most impressive kicker for all the investors in our BP community is your ability to react to an opportunity immediately. Just imagine, 4 years into executing the plan described above, someone offers you to buy an apartment and if you can do it right away and in cash you get it for $50 instead of $65K. With your HELOC strategy you can do that at that same day, write the check for the $50K, close and receive title. If that apartment pays you $300/month after expenses, you will still be done with your original $100K purchase after a total of about 10 years. After that time you own your original property plus the $50K apartment. With that you can buy more properties using the full $150K. With the original traditional mortgage plan you would still have to pay for another 20 years and your balance (showing how much you owe in principle) will be still almost the same $100K as you had at the beginning. Daily average interest and access to equity are the two main points. Your life is totally the same and your payments are totally the same. You go amortized and be a proud owner of a $100K property 30 year later (assuming no appreciation). I go HELOC and will be the proud owner of $450K in equity (assuming no appreciation). I guess you decide what you prefer.

@David Dachtera @Don Spafford I have run the numbers in so many scenarios and in NO scenario is it better to borrow money at a higher interest rate to pay down a loan with a lower interest rate. I am so glad you sent me this scenario, because it confirms what I have asserted. I have returned to you what you get when you run the numbers. All I am saying is run your numbers and see if it works for your particular scenario. The numbers will change if you have a 0% interest credit card or LOC. That would work, if your interest is less, you will pay less. First of all you put the excel sheet together wrong. When you take out a HELOC, you would begin your loan payments with the $15,000 dollar payment. It would be paid on the first month, the thirteenth month, the 25th month, and so on. You borrow the $15,000 and put it towards the loan, then make payments on the HELOC to pay it off. You have the HELOC getting paid off before you apply the $15,000. If you compare my sheet against the sheet you sent, it pays off 8.8 years instead of your 9.17 and the interest paid is only $49,866.22 instead of $52,073.75. Next, you have paid the $15,000 each year, but have only calculated the $15,000 being borrowed once. It would need to be borrowed every year. You borrow, pay it off, borrow, pay it off, and so on. You would need to borrow that $15,000 nine times. Now, with the numbers in your scenario run correctly, you can compare to the numbers ran if you take that same $2375 payment ($1073.64 Mortgage payment + $1301.36 HELOC payment) and just pay that each month on your 5% loan. Without going through the hoops of a HELOC, the loan is paid off in 8.7 years (instead of 8.8), making 104 payments (instead of 106), and the real kicker, paying $46,829.06 in interest (instead of $49,866.22). In conclusion, yes, if you pay an extra $15,000 a year towards your mortgage you will pay it off much sooner than if you don't, but NO you will not save money using a higher interest HELOC to do it. You will actually pay almost $3,000 more. Perhaps my excel sheets will help illustrate my frustration of what is being taught. Corrected Loan Acceleration Run Your Numbers Hopefully, my links will work. I am new to Bigger Pockets so I am not sure how you did that cool attachment to your excel sheet. This is my work around. I hope you consider reposting the corrections. Thank You.

Has anyone ever used the Velocity Banking Strategy?

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

7y

Originally posted by @Brian Cardwell:

Wow @Scott L. and @Joe Splitrock

Just because you don't like it the tool doesn't mean you have to bash it the way you continue to do. The process works. As usual, the ones that don't understand put out false/ bad information.

@Tony Kim

So if you have a 200k loan @3.25% , you will pay approximately 113k in interest over the life of the loan. If you use the velocity method at 10k every 5months, you will pay appoximatey 22k in interest over the life if the loan (approx. 7years). Looks like to me you will save at least 90k in interest payments. I don't know what you owe on your mortgage so I used the number I use most of the time. (NOT 100k). The savings isnt made on the timing of paying your bills. Don't let that misinformation fool you.

This isn't for everyone as has been said earlier. One needs to be financially sound and discipline to make this work.

FYI the sky isn't falling. I have a interest cap on my Heloc I am not really concerned with the slow increase in interest rates either way.

HI Brian, I currently have a 3.25% loan where my P&I is $1,480 and my original principal balance was 340K, so I'll be paying 197K total interest. I generally make my payments at the beginning of each month. Given my specific situation, how exactly would I be able to chop off so much of the interest I'll be paying?

Also, given my interest rate, would it really be in my interest to pay the loan off early?

Appreciate your help!

0 Reply

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

7y

Originally posted by @Scott L.:

@Ben Zimmerman

The "simple interest" mortgage definition in Investopedia doesn't really make sense, because it doesn't define what "calculating interest monthly" vs. "calculating interest daily" means. If you calculate interest by dividing 5.00% by 365 and apply it to the principal balance every day for a year, it is no different than dividing it by 12 and applying it at the end of each month when the normal payment is applied. What everyone is arguing about, is what happens when you pay a payment before (or after) the due date, or make an extra principal payment during the month. What happens on both standard amortizing mortgages and HELOCs, is that the principal balance on the loan is reduced by the payment minus the interest accrued to that DAY, and the interest for the next payment due, is recalculated.

Virtually all amortizing loans are "simple" interest in the sense that there is no "interest on interest" or compounding, because every scheduled payment covers more than the interest accrued between payment posting dates unless you default.

Hi Scott,

Still talking about this? hehe. I thought we agreed this was just a matter of semantics?

I think the difference is "accrued" vs. "calculated"

Obviously the mortgage accrues interest on a daily basis.... but it is still calculated on the principal balance at a certain point in time of each month. Like I mentioned to you in private chat, it makes no difference if you make your early principal payments on the 5th, 6th or the 7th....because the basis for the amount being accrued on a daily basis does not change on the specific day in which you make your payment. It will still be determined at a certain point in time of the month. You can call this a daily accrual if you want because technically it accrues daily. I have no problem with that. But within the industry, this is still considered a monthly mortgage.

0 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

Originally posted by @Tony Kim:

Originally posted by @Brian Cardwell:

Wow @Scott L. and @Joe Splitrock

Just because you don't like it the tool doesn't mean you have to bash it the way you continue to do. The process works. As usual, the ones that don't understand put out false/ bad information.

@Tony Kim

So if you have a 200k loan @3.25% , you will pay approximately 113k in interest over the life of the loan. If you use the velocity method at 10k every 5months, you will pay appoximatey 22k in interest over the life if the loan (approx. 7years). Looks like to me you will save at least 90k in interest payments. I don't know what you owe on your mortgage so I used the number I use most of the time. (NOT 100k). The savings isnt made on the timing of paying your bills. Don't let that misinformation fool you.

This isn't for everyone as has been said earlier. One needs to be financially sound and discipline to make this work.

FYI the sky isn't falling. I have a interest cap on my Heloc I am not really concerned with the slow increase in interest rates either way.

HI Brian, I currently have a 3.25% loan where my P&I is $1,480 and my original principal balance was 340K, so I'll be paying 197K total interest. I generally make my payments at the beginning of each month. Given my specific situation, how exactly would I be able to chop off so much of the interest I'll be paying?

Also, given my interest rate, would it really be in my interest to pay the loan off early?

Appreciate your help!

How much cash flow do you have each month? That would determine how much of the HELOC I would use.

0 Reply

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

7y

Originally posted by @Brian Cardwell:

Originally posted by @Tony Kim:

Originally posted by @Brian Cardwell:

Wow @Scott L. and @Joe Splitrock

Just because you don't like it the tool doesn't mean you have to bash it the way you continue to do. The process works. As usual, the ones that don't understand put out false/ bad information.

@Tony Kim

So if you have a 200k loan @3.25% , you will pay approximately 113k in interest over the life of the loan. If you use the velocity method at 10k every 5months, you will pay appoximatey 22k in interest over the life if the loan (approx. 7years). Looks like to me you will save at least 90k in interest payments. I don't know what you owe on your mortgage so I used the number I use most of the time. (NOT 100k). The savings isnt made on the timing of paying your bills. Don't let that misinformation fool you.

This isn't for everyone as has been said earlier. One needs to be financially sound and discipline to make this work.

FYI the sky isn't falling. I have a interest cap on my Heloc I am not really concerned with the slow increase in interest rates either way.

HI Brian, I currently have a 3.25% loan where my P&I is $1,480 and my original principal balance was 340K, so I'll be paying 197K total interest. I generally make my payments at the beginning of each month. Given my specific situation, how exactly would I be able to chop off so much of the interest I'll be paying?

Also, given my interest rate, would it really be in my interest to pay the loan off early?

Appreciate your help!

How much cash flow do you have each month? That would determine how much of the HELOC I would use.

Let's just say hypothetically that my cash inflows are 20k and my monthly expenses total 15k. So I would make a 20k principal payment from my HELOC to my mortgage in addition to my normal monthly payment but I guess I would make that payment around the 10th or right before the due date to minimize the interest accrued on the HELOC, which is based on a simple interest Calc (which is different from the standard mortgage Calc). Then, I would pay down the HELOC as I received my paychecks and as my rent money and distributions came in. I would try to pay my bills as late as possible so that I can zero out the HELOC balance before paying my bills. Does that sound correct?

If so, then it sounds like my original post had the right idea. It is basically taking advantage of the inherent flexibility of the daily simple interest calculation of the HELOC vs the standard calculation of a traditional mortgage. Not knocking it..... just genuinely trying to understand it so I can know what to input into my spreadsheet. Thanks!

0 Reply

Scott L.

Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes

7y

Originally posted by @Tony Kim:

Originally posted by @Scott L.:

@Ben Zimmerman

The "simple interest" mortgage definition in Investopedia doesn't really make sense, because it doesn't define what "calculating interest monthly" vs. "calculating interest daily" means. If you calculate interest by dividing 5.00% by 365 and apply it to the principal balance every day for a year, it is no different than dividing it by 12 and applying it at the end of each month when the normal payment is applied. What everyone is arguing about, is what happens when you pay a payment before (or after) the due date, or make an extra principal payment during the month. What happens on both standard amortizing mortgages and HELOCs, is that the principal balance on the loan is reduced by the payment minus the interest accrued to that DAY, and the interest for the next payment due, is recalculated.

Virtually all amortizing loans are "simple" interest in the sense that there is no "interest on interest" or compounding, because every scheduled payment covers more than the interest accrued between payment posting dates unless you default.

Hi Scott,

Still talking about this? hehe. I thought we agreed this was just a matter of semantics?

I think the difference is "accrued" vs. "calculated"

Obviously the mortgage accrues interest on a daily basis.... but it is still calculated on the principal balance at a certain point in time of each month. Like I mentioned to you in private chat, it makes no difference if you make your early principal payments on the 5th, 6th or the 7th....because the basis for the amount being accrued on a daily basis does not change on the specific day in which you make your payment. It will still be determined at a certain point in time of the month. You can call this a daily accrual if you want because technically it accrues daily. I have no problem with that. But within the industry, this is still considered a monthly mortgage.

Check your monthly mortgage statements if you have made additional payments to principal. I think you will find this is not true. Especially considering large payments could be made mid month. I have had 3 and I have verified that is not the case. They may call it “average daily balance” but it takes into account the exact number of days from when a principal payment was made. This is even true for regular payments made earlier or later in the month, though the effect is negligible. Also true of auto loans and most all amortized payment loans.

0 Reply

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

7y

Originally posted by @Scott L.:

Originally posted by @Tony Kim:

Originally posted by @Scott L.:

@Ben Zimmerman

The "simple interest" mortgage definition in Investopedia doesn't really make sense, because it doesn't define what "calculating interest monthly" vs. "calculating interest daily" means. If you calculate interest by dividing 5.00% by 365 and apply it to the principal balance every day for a year, it is no different than dividing it by 12 and applying it at the end of each month when the normal payment is applied. What everyone is arguing about, is what happens when you pay a payment before (or after) the due date, or make an extra principal payment during the month. What happens on both standard amortizing mortgages and HELOCs, is that the principal balance on the loan is reduced by the payment minus the interest accrued to that DAY, and the interest for the next payment due, is recalculated.

Virtually all amortizing loans are "simple" interest in the sense that there is no "interest on interest" or compounding, because every scheduled payment covers more than the interest accrued between payment posting dates unless you default.

Hi Scott,

Still talking about this? hehe. I thought we agreed this was just a matter of semantics?

I think the difference is "accrued" vs. "calculated"

Obviously the mortgage accrues interest on a daily basis.... but it is still calculated on the principal balance at a certain point in time of each month. Like I mentioned to you in private chat, it makes no difference if you make your early principal payments on the 5th, 6th or the 7th....because the basis for the amount being accrued on a daily basis does not change on the specific day in which you make your payment. It will still be determined at a certain point in time of the month. You can call this a daily accrual if you want because technically it accrues daily. I have no problem with that. But within the industry, this is still considered a monthly mortgage.

Check your monthly mortgage statements if you have made additional payments to principal. I think you will find this is not true. Especially considering large payments could be made mid month. I have had 3 and I have verified that is not the case. They may call it “average daily balance” but it takes into account the exact number of days from when a principal payment was made. This is even true for regular payments made earlier or later in the month, though the effect is negligible. Also true of auto loans and most all amortized payment loans.

Wow, seriously? How long are you going to push this fallacy? If you make an additional principal payment anytime within the first 15 to 20 days of the month, most lenders will credit this payment against the principal balance of the prior month. So if you make a 1,000 additional principal payment on the 15th, then you will have saved 15 days worth of interest on that 1,000 because your mortgage company will calculate interest the following month the same as if you made the payment on the first. If you make it on the 10th, then you will have saved 10 days worth of interest. That's how a standard mortgage works. The interest is calculated monthly, although the accrual simulates daily. Please do some research before digging your heels any deeper on this. This is getting tiresome.

0 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

Originally posted by @Tony Kim:

Originally posted by @Brian Cardwell:

Originally posted by @Tony Kim:

Originally posted by @Brian Cardwell:

Wow @Scott L. and @Joe Splitrock

Just because you don't like it the tool doesn't mean you have to bash it the way you continue to do. The process works. As usual, the ones that don't understand put out false/ bad information.

@Tony Kim

So if you have a 200k loan @3.25% , you will pay approximately 113k in interest over the life of the loan. If you use the velocity method at 10k every 5months, you will pay appoximatey 22k in interest over the life if the loan (approx. 7years). Looks like to me you will save at least 90k in interest payments. I don't know what you owe on your mortgage so I used the number I use most of the time. (NOT 100k). The savings isnt made on the timing of paying your bills. Don't let that misinformation fool you.

This isn't for everyone as has been said earlier. One needs to be financially sound and discipline to make this work.

FYI the sky isn't falling. I have a interest cap on my Heloc I am not really concerned with the slow increase in interest rates either way.

HI Brian, I currently have a 3.25% loan where my P&I is $1,480 and my original principal balance was 340K, so I'll be paying 197K total interest. I generally make my payments at the beginning of each month. Given my specific situation, how exactly would I be able to chop off so much of the interest I'll be paying?

Also, given my interest rate, would it really be in my interest to pay the loan off early?

Appreciate your help!

How much cash flow do you have each month? That would determine how much of the HELOC I would use.

Let's just say hypothetically that my cash inflows are 20k and my monthly expenses total 15k. So I would make a 20k principal payment from my HELOC to my mortgage in addition to my normal monthly payment but I guess I would make that payment around the 10th or right before the due date to minimize the interest accrued on the HELOC, which is based on a simple interest Calc (which is different from the standard mortgage Calc). Then, I would pay down the HELOC as I received my paychecks and as my rent money and distributions came in. I would try to pay my bills as late as possible so that I can zero out the HELOC balance before paying my bills. Does that sound correct?

If so, then it sounds like my original post had the right idea. It is basically taking advantage of the inherent flexibility of the daily simple interest calculation of the HELOC vs the standard calculation of a traditional mortgage. Not knocking it..... just genuinely trying to understand it so I can know what to input into my spreadsheet. Thanks!

Yes that sounds pretty much on base.

I would pull 20k from my heloc. Then I would put it on the primary the day after I made my normal payment. Then continue as you have stated.

0 Reply

Scott L.

Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes

7y

Originally posted by @Tony Kim:

Originally posted by @Scott L.:

Originally posted by @Tony Kim:

Originally posted by @Scott L.:

@Ben Zimmerman

The "simple interest" mortgage definition in Investopedia doesn't really make sense, because it doesn't define what "calculating interest monthly" vs. "calculating interest daily" means. If you calculate interest by dividing 5.00% by 365 and apply it to the principal balance every day for a year, it is no different than dividing it by 12 and applying it at the end of each month when the normal payment is applied. What everyone is arguing about, is what happens when you pay a payment before (or after) the due date, or make an extra principal payment during the month. What happens on both standard amortizing mortgages and HELOCs, is that the principal balance on the loan is reduced by the payment minus the interest accrued to that DAY, and the interest for the next payment due, is recalculated.

Virtually all amortizing loans are "simple" interest in the sense that there is no "interest on interest" or compounding, because every scheduled payment covers more than the interest accrued between payment posting dates unless you default.

Hi Scott,

Still talking about this? hehe. I thought we agreed this was just a matter of semantics?

I think the difference is "accrued" vs. "calculated"

Obviously the mortgage accrues interest on a daily basis.... but it is still calculated on the principal balance at a certain point in time of each month. Like I mentioned to you in private chat, it makes no difference if you make your early principal payments on the 5th, 6th or the 7th....because the basis for the amount being accrued on a daily basis does not change on the specific day in which you make your payment. It will still be determined at a certain point in time of the month. You can call this a daily accrual if you want because technically it accrues daily. I have no problem with that. But within the industry, this is still considered a monthly mortgage.

Check your monthly mortgage statements if you have made additional payments to principal. I think you will find this is not true. Especially considering large payments could be made mid month. I have had 3 and I have verified that is not the case. They may call it “average daily balance” but it takes into account the exact number of days from when a principal payment was made. This is even true for regular payments made earlier or later in the month, though the effect is negligible. Also true of auto loans and most all amortized payment loans.

Wow, seriously? How long are you going to push this fallacy? If you make an additional principal payment anytime within the first 15 to 20 days of the month, most lenders will credit this payment against the principal balance of the prior month. So if you make a 1,000 additional principal payment on the 15th, then you will have saved 15 days worth of interest on that 1,000 because your mortgage company will calculate interest the following month the same as if you made the payment on the first. If you make it on the 10th, then you will have saved 10 days worth of interest. That's how a standard mortgage works. The interest is calculated monthly, although the accrual simulates daily. Please do some research before digging your heels any deeper on this. This is getting tiresome.

I don’t feel like posting my mortgage statements for all to see, but anyone with an online mortgage account and a calculator can see for themselves. Or if you’re really interested read the mortgage contract language in your note to understand how funds are applied. Maybe you’ll surprise me and find the “first 15 or 20 days or so” in the legal language. Check out any other amortizing loans with monthly payments too...like auto loans.

0 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

7y

Why does it even matter how interest is accrued? In the grand scheme of things even 30 days interest is very little. Let's say you have a loan at 3.25% and make an extra $1000 payment each month. The most that $1000 could cost you in interest within that month is $2.70, so it really doesn't matter how the interest is accrued. Whether you pay $1 of it or the full $2.70 - you could save more than $2.70 by skipping your daily Starbucks.

It is the EXTRA PRINCIPAL PAYMENTS that pay a loan off early. HELOC has nothing to do with this. If you pay $1000 extra every month, whether through a HELOC or direct, it will significantly reduce your term and interest paid. No matter what day you make that payment, makes little difference.

0 Reply

Jim Macedon

Round Rock, TX · Member since 2017 · 86 posts · 45 votes

7y

I don't want to stray into troll territory here, but come on, this is comical after a while. 10 pages later the acolytes of velocity banking still keep posting that we all lack understanding of the concept, yet they still--10 pages later--have yet to explain how taking out a loan for a higher interest rate to pay off another loan with a lower interest rate makes sense.

1 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

Real simple. You use the Line of Credit to pay more on the principle while still having access to the money. That is it. Real simple and no magic. If you don't accept/ understand it, it is ok. Just reread the previous 10 pages.

The answer to your question is in the previous 10 pages.

0 Reply

Justin H.

Kirkland, WA · Member since 2018 · 25 posts · 39 votes

7y

Originally posted by @Brian Cardwell:

I would pull 20k from my heloc. Then I would put it on the primary the day after I made my normal payment. Then continue as you have stated.

So you would start saving the mortgage interest accrual on that 20k, but at that moment you would also start accruing interest (at typically a higher rate) on that same 20K as it was pulled from the HELOC.

0 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

Originally posted by @Justin H.:

Originally posted by @Brian Cardwell:

I would pull 20k from my heloc. Then I would put it on the primary the day after I made my normal payment. Then continue as you have stated.

So you would start saving the interest accrual on that 20k, but at that moment you would also start accruing interest (at typically a higher rate) on that same 20K as it was pulled from the HELOC.

@Justin H.

Please explain your question a bit more. We are not just talking about this one part of the process.

0 Reply

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

7y

I don't mean to take sides on this issue as it is obviously something in which folks on both sides of this issue will not budge. However, I will say that I understand how it works, and for some people who are meticulous with this sort of thing, it can be somewhat beneficial. Speaking personally, I'm pretty sure I will not be doing it myself because the return on time spent is not worth it.

Also, without an understanding of how the simple interest on a HELOC works vs. how it works on a standard mortgage, this strategy will not make sense to you. Understand the above, and then it will be real clear how it works as the concept behind it is very simple.

1 Reply

Jim Macedon

Round Rock, TX · Member since 2017 · 86 posts · 45 votes

7y

In case you skipped to the last page and need a summary of this entire thread, here it is:

"You can pay off your mortgage fast. Just get a line of credit for a higher interest rate and use it to pay off your mortgage!"

"Wait, what? How could you possibly come out ahead by paying off a lower interest rate loan with a higher interest rate loan?"

"It works, you just don't understand it."

"Okay, please explain how it works."

"Look, moron, it's very simple. If you are too stupid to understand it, that's not my problem."

"Okay, if it's that simple, you should have no problem explaining how it works."

"I can't explain how it works, it just does."

Then this cycle repeated itself about 25 times.

3 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

@Jim Macedon

You are either part of the problem or part of the solution. Which one are you? Based on your last post I have an idea. You are entitled to your opinion.

0 Reply

Justin H.

Kirkland, WA · Member since 2018 · 25 posts · 39 votes

7y

@Brian Cardwell No question. Just reiterating why putting money on the LOC is the equivalent of 'dragging the brakes' with the so-called 'velocity' method vs just maintaining a $0 balance LOC while putting the same amount of extra income towards the mortgage each month. Even though it has been brought up previously, I only redundantly do so as it's something I have yet to see properly accounted for in any of the examples intended to support it.

0 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

Originally posted by @Justin H.:

@Brian Cardwell No question. Just redundantly reiterating why putting money on the LOC is the equivalent of 'dragging the brakes' with the so-called 'velocity' method vs just maintaining a $0 balance LOC while putting the same amount of extra income towards the mortgage each month. It's something I have never seen properly accounted for in any of the examples designed to support it.

Fair enough... its not for you. Cool.

0 Reply

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

7y

Originally posted by @Justin H.:

@Brian Cardwell No question. Just reiterating why putting money on the LOC is the equivalent of 'dragging the brakes' with the so-called 'velocity' method vs just maintaining a $0 balance LOC while putting the same amount of extra income towards the mortgage each month. Even though it has been brought up previously, I only redundantly do so as it's something I have yet to see properly accounted for in any of the examples intended to support it.

Take 10K from the LOC and make an additional principal payment on the mortgage. Interest accrued the following month on your mortgage balance will be based on the 10K reduced amount. At the same time, as money from your W-2 and rental properties come in during the month, pay down your LOC. The interest charged to your LOC for the same period will be based on the average principal balance, which would presumably be less than the 10K you paid down since it is calculated daily...unlike your mortgage which accrues daily, but is calculated monthly. Once you understand the concept behind simple interest vs. the interest on your mortgage, you'll realize there are several different ways you play this. Timing is key.

Again, not saying this is a good strategy or a bad one. Just explaining how it works....and I don't know any simpler way to explain it. I'll let you be the judge....

0 Reply

James Yoo

Rental Property Investor · Los Angeles, CA · Member since 2018 · 29 posts · 32 votes

7y

My takeaway from reading 10 pages of this thread is that I'm an absolutely confused moron.

5 Reply

John Gochangco

Lodi CA · Member since 2018 · 27 posts · 5 votes

7y

Lol @james yoo you just made it 11. The way I see it if you are disciplined at repaying the loan whether it comes from heloc or passive income you will shave years off your mortgage quickly. Relative on how much mortgage you owe. 10 k payment can knock a huge dent or significant years off if ur loan is 200k or less. If ur loan is greater than 400k very little. So it's all relative and if it's a heloc with higher rate you will have to pay it down quick to reap the benefit. Discipline!

1 Reply

David Stange

Investor · Menomonie, WI · Member since 2016 · 5 posts · 0 votes

7y

I think everyone is missing the point. The point isn't pure cash vs interest, of coarse pure cash wins every time. The advantage is 2 fold but it takes massive amounts of discipline to work. The reason to use the Heloc as opposed to cash is that the cash is gone and can never be used again so your paying down the loan but the cupboards are bare. Where as by using the HELOC, aka a debt instrument, you are making an immediate impact and yes that money is gone just like cash but when you place ALL of your Rents received at the HELOC and pay bills from the heloc, the savings shows back up plus technically on the month you just made the huge payment, you wouldn't need to make a mortgage payment. Granted that slows the payoff but it quickens the cash building so it's roughly a horse a piece. In closing the idea is not a financial gain over cash it's a way to utilize All your income to pay something off faster then you normally would because let's face it when you see savings you see opportunity to spend even if you justify it by fixing your properties. This method shifts priorities and if you did it 3 times you'd have way more equity because no one is taking cold hard cash and losing it into a mortgage. Even better would be to use an investment account so your cash is earning interest while you make payments.

0 Reply

Joshua S.

Member since 2018 · 294 posts · 97 votes

7y

Originally posted by @Jim Macedon:

In case you skipped to the last page and need a summary of this entire thread, here it is:

"You can pay off your mortgage fast. Just get a line of credit for a higher interest rate and use it to pay off your mortgage!"

"Wait, what? How could you possibly come out ahead by paying off a lower interest rate loan with a higher interest rate loan?"

"It works, you just don't understand it."

"Okay, please explain how it works."

"Look, moron, it's very simple. If you are too stupid to understand it, that's not my problem."

"Okay, if it's that simple, you should have no problem explaining how it works."

"I can't explain how it works, it just does."

Then this cycle repeated itself about 25 times.

I think I can explain how it works pretty easily. When you're paying down your mortgage via the normal payments you are paying interest from the entire balance while trying to pay the principal down. This means that it's hard to build equity (especially early on) because most of your money is going toward interest.

When you move a chunk of the balance over to the HELOC you are able to pay it down without having to pay interest on the entire balance. That is, for example, if you move a chunk of $10,000 to the HELOC you are paying interest on the $10,000 while you pay down that $10,000, which means you can pay it down in 6-10 months at an interest cost of around $500. If you leave that $10,000 chunk on the mortgage, you are paying interest on the full balance, so it takes around 2 years to pay down at an interest cost of about $20,000. Of course, you could also just make additional principal payments without using the HELOC, but using the HELOC makes it automatic so it's a form of forced discipline. The HELOC is paid down naturally over time due to the fact that you make more than you spend and then you reload and repeat the process.

I think of it like that service Acorns where they round all of your purchases up to the nearest dollar and put the difference into an investment account for you. You're technically setting aside money to invest, but since it's happening organically behind the scenes and you don't really miss it, it's almost as if it's free money. In the case of the HELOC, you use it like a checking account so all of your surplus funds pay the balance down gradually and again, you're technically making extra principal payments every month, but since you aren't really missing the money it's like your mortgage is automatically being paid down faster. It's essentially a system that keeps all of your extra income going toward your mortgage principal every month.

In a comparison between using the HELOC strategy and paying all of your extra income toward your principal every month, the difference is negligible and you'd get comparable results.

But in a comparison between using the HELOC strategy and what most people do, which is pay their regular payments (and therefore maximum mortgage interest), the HELOC strategy is vastly superior because it saves tens of thousands of dollars and years off of your mortgage automatically simply by rearranging the way you do your banking. Hope this helps.

2 Reply

Jim Macedon

Round Rock, TX · Member since 2017 · 86 posts · 45 votes

7y

So essentially you acknowledge that from a math standpoint, you lose money by paying X amount towards a HELOC every month instead of just paying the exact same amount per month towards your principal. But you argue for the psychological effect of enforcing discipline by making this a bill you have to pay every month, even though it is less efficient.

To that I would reply that if someone has a problem with discipline, the last thing they need is more debt at a higher interest rate.

2 Reply

Brian CardwellPro Member

Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes

7y

Originally posted by @Jim Macedon:

So essentially you acknowledge that from a math standpoint, you lose money by paying X amount towards a HELOC every month instead of just paying the exact same amount per month towards your principal. But you argue for the psychological effect of enforcing discipline by making this a bill you have to pay every month, even though it is less efficient.

To that I would reply that if someone has a problem with discipline, the last thing they need is more debt at a higher interest rate.

@Jim Macedon,he acknowledged that a long time ago but he is saying what he said. The whole post was about paying the mortgage over 30 yearsto vs. the "velocity banking strategy". The post was "has anyone ever used the Velocity Banking Strategy?". How does it work?

So people are so hell bent on bashing another method of doing something, that the general purpose of this forum and thread has been forgotten.

Now we could go to absolutes and say don't get a mortgage at all. Pay cash for everything.That would be the best way mathmaticly to pay for a home. I sure some would argue against that to.

Before you do, ask yourself why do we need money?

2 Reply

Has anyone ever used the Velocity Banking Strategy?

Has anyone ever used the Velocity Banking Strategy?

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