Investor · Idaho Falls, ID · Member since 2016 · 935 posts · 629 votes
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.
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.
I think you're missing the point. I'm telling you that moving the money over to a different vehicle is about paying it in a different way and your response is that it's about the difference between the two rates. This is why the discussion never goes anywhere. Everyone understands that the rate is higher on the HELOC, but you're paying interest on the $10,000 while you pay down the $10,000. The interest on the mortgage is lower, but you're paying interest on $200,000 while you pay down the $10,000. There's a massive difference between those two things. And let's say that hypothetically you "lose" money because of the difference in the rates, I call that paying for the convenience of having it all be automatic. You ever take your car to an automatic car wash, pay anyone to mow your lawn, go out to dinner, etc.? Any time you pay someone to do something that you could do, you are "losing" money on the difference between what you paid someone to do it and what you could have saved doing it yourself. This strategy more than pays for itself and saves you thousands in the long run, but if you want to call the difference in interest a "fee" to make the whole thing automatic, that's fine. Many people pay for far worse. Hell, some people drop over a hundred dollars to do things like going to the movies every month. If that little bit of extra interest on the HELOC is what I pay for the peace of mind that all my cash is working for me at all times, so be it. I'll gladly pay that few dollars every month.
And the rest of your response is off base, too. The HELOC is not "a bill you have to pay every month", it's essentially your new checking account. Most people (probably you) have money sitting in checking right now that's doing nothing for them. I put my entire checking account and another $10,000 on my mortgage and then my income and bills just come and go from the HELOC until it's paid down. It's forced discipline in the sense that you don't have to decide every month to put more money against your mortgage and then figure out how much you can afford (it's done for you through your regular income and bills), but it's not a gun to my head. The money is just paid back as I go at my own pace. It's forced discipline in the loosest possible sense. My point was that it's done automatically for you, which as I said is a good thing. I don't have to carry my electricity back from the electricity fields in a bunch of buckets and store it on my shelves, for example. I pay the power company to harvest it and have the tiny chipmunks run electric acorns through the power lines or however that works, so that when I flip a switch it's there. But you'd never begrudge anyone for paying to have electricity be automatic, because some conveniences are worth paying for.
And if you want to talk efficiency, take a look at that dead money in your checking account and then think about the fact that my checking account is always working for me and getting 4% returns and I'll be out of debt in under ten years. Part of the problem is that everyone wants to compare this strategy to "just paying the same amount (what you would have paid to the HELOC) to the mortgage every month", but no one is really doing that, so it's an unreasonable comparison. It's basically like saying you could pay your mortgage down a lot faster than me if you won the lottery or you bet you could throw a better fastball than me if you were Randy Johnson. Start comparing what you are actually doing to what I'm actually doing and I promise you if you do traditional banking I'm hands down blowing you out of the water at paying your mortgage down quickly. That's the real point of the discussion that no one wants to acknowledge. There might be a couple flaws in my way of doing it, but if you need hypotheticals to win in a comparison, you actually lost the comparison and don't want to admit it.
Wow... that was a long read. I can definitely see both points of view in this thread. And I would agree that making the extra payments you have available to the amortized loan is better than carrying the difference on a slightly higher interest rate from a heloc. But to me, it seems like the real value of implementing the heloc strategy is always having your extra cash more readily available for when that sweet deal pops up without having to incur closing costs of a new financing option.
From what i can tell, paycheck parking brings the average monthly interest down. If you are disciplined enough to not spend beyond your expenses it forces all of your extra cash flow onto the debt. You can get the same affect by just making extra principle payments on debt, but you have to be even more disciplined to send every extra penny every month.
It all depends on your situation. One size does not fit all. You have to find the sweet spot for you. The most important thing to note is that in any situation, you have to have cashflow at the end of each month. If you don't, you are like 80% of the nation and living entirely paycheck to paycheck or rent check to rent check. Use good judgement, have a rainy day fund no matter what.
I kind of utilize the best of both worlds. I like to have liquid cash on hand. Because I make a very good salary I invest up to the federal limit before penalty into an aggressive 401k portfolio and utilize a HELOC to help get the 30 yr. ammortized loan down to about 8 years. I got a HELOC with a local credit union with no balloon payment, 10 year draw, 5 year payback period, first year intro rate of 2.99% and prime rate after. They paid closing costs, I paid for the appraisal. Remember, HELOCs are simple or average daily balance interest computations so you only pay on what you owe.
Get your ammortization schedule from your lender and start laying out scenarios of chunking your mortage with different amounts and how long it will take you to pay off those chunks. Figure out what it cost to carry the balance of the chunk. For me, paying about $800 a year to accelerate the process by about 22 years is worth it.
If one more person says "why don't you just put your cashflow toward the principal" I might scream. Look at your ammortized schedule and see for yourself the difference! For me, I'd have to wait 10 pay periods to achieve what could have been done in one transaction. Chunk the mortgage with the HELOC and watch more of your monthly payment go to principal, not interest. If not, in my case, make payments for 30 years and pay back $420,000 for borrowing $240,000. You tell me what is smart, avoiding a $180,000 interest bill and 30 years of debt or being 100% debt free in 8 years with the rest of my life to invest and hopefully build wealth. Some will say the words "opportunity costs" and have never opened a spreadsheet or done a calculation. Bottom line is what works for you? For me walking on grass that is mine (minus property tax :( ) sounds amazing! Good luck!
I put together a spreadsheet based off of one I found on vertex42.com that shows the differences between using the velocity banking method, making just your regular payments, and simply putting all of your extra cash directly towards your mortgage principal. I had to alter the one they had there because they originially made some false assumptions which I believe I cleared up in my version.
You can play around with the numbers, interest rates, etc. and you can see which one is the best.
That being said, while I BELIEVE it is good to go, I can't be 100% sure, so if you see errors or ways to improve it, let me know.
It all depends on your situation. One size does not fit all. You have to find the sweet spot for you. The most important thing to note is that in any situation, you have to have cashflow at the end of each month. If you don't, you are like 80% of the nation and living entirely paycheck to paycheck or rent check to rent check. Use good judgement, have a rainy day fund no matter what.
I kind of utilize the best of both worlds. I like to have liquid cash on hand. Because I make a very good salary I invest up to the federal limit before penalty into an aggressive 401k portfolio and utilize a HELOC to help get the 30 yr. ammortized loan down to about 8 years. I got a HELOC with a local credit union with no balloon payment, 10 year draw, 5 year payback period, first year intro rate of 2.99% and prime rate after. They paid closing costs, I paid for the appraisal. Remember, HELOCs are simple or average daily balance interest computations so you only pay on what you owe.
Get your ammortization schedule from your lender and start laying out scenarios of chunking your mortage with different amounts and how long it will take you to pay off those chunks. Figure out what it cost to carry the balance of the chunk. For me, paying about $800 a year to accelerate the process by about 22 years is worth it.
If one more person says "why don't you just put your cashflow toward the principal" I might scream. Look at your ammortized schedule and see for yourself the difference! For me, I'd have to wait 10 pay periods to achieve what could have been done in one transaction. Chunk the mortgage with the HELOC and watch more of your monthly payment go to principal, not interest. If not, in my case, make payments for 30 years and pay back $420,000 for borrowing $240,000. You tell me what is smart, avoiding a $180,000 interest bill and 30 years of debt or being 100% debt free in 8 years with the rest of my life to invest and hopefully build wealth. Some will say the words "opportunity costs" and have never opened a spreadsheet or done a calculation. Bottom line is what works for you? For me walking on grass that is mine (minus property tax :( ) sounds amazing! Good luck!
Why would you scream if one more person says "why don't you just put your cashflow toward the principal?" I don't really see how an amortization schedule would change anything. Either way, you can take a look at the spreadsheet I linked to in my previous comment to see why I don't think you should scream as putting your cashflow directly towards the principal seems to be almost the same as chunking given all equal interest rates. I don't currently have a way to account for an initial lower rate like 2.99%, but I can try to add that to the spreadsheet to help others see how that could benefit them as well. That would be important to note.
The spreadsheet does account for daily computing like an LOC vs monthly computing like a mortgage as well.
One advantage of using the HELOC method is that it is an open ended loan. You can use the money that you paid at any time. The mortgage is a closed loan. Once you pay your money, you can't get it back.
@Daniel Weed - I mentioned I would scream because anyone looking at this board would have seen that question asked several times already throughout the other 11 pages. :)
Ultimately, this strategy works because of the difference between Simple Interest and Amortized Interest. Paying off large chunks of principle at a time rushes you through the amortization schedule of a fixed mortgage. You are in essence, trying to negate the effects of the front loaded interest. The life of the loan shrinks as the principle balance shrinks but it works faster if you “bulk” the Payments. Each large payment towards the mortgage principle is followed by your normal monthly payments which drastically shifts the P&I on the payment away from Interest.
Meanwhile, the Simple Interest being assessed on the Line of Credit is minimal because you are constantly paying it down and pushing it back up.
Amortized Interest aims to maintain maximum interest profit over time for the bank by keeping the Principle balance higher in the front and middle years of the loan.
The light bulb moment is when people plug in their personal numbers is what I've noticed. I use to think the same way as many of the people in this thread against it. I have no regrets since starting.
Just wanted to confirm that the magic of velocity banking is that it accelerates your mortgage so that when you make payments normally the amount of principal that is paid is higher while you juggle the chunk payment debt according to your monthly income through paycheck parking to avoid the higher interest rate of a credit card? This would mean that without making any actual additional payments you would then still pay off the loan faster because you are always paying at some principal vs interest ratio. The videos I watched initially were very confusing because the debt would just go away faster than the amount of income could support, but what I am talking about can be best illustrated through downloading the calculator in this link.
The schools need to teach financial education. The only way this strategy can save you money is if a HELOC is at the same or lower interest rate as the mortgage. Since interest on a HELOC is calculated at the daily rate, you can make payments anytime of the month to reduce the principal, which can save a small amount of interest if the rate is the same as the mortgage. If the HELOC rate is higher, you will lose money every time. I saw some comments from people that have it correct that this method will not save you money.
The schools need to teach financial education. The only way this strategy can save you money is if a HELOC is at the same or lower interest rate as the mortgage. Since interest on a HELOC is calculated at the daily rate, you can make payments anytime of the month to reduce the principal, which can save a small amount of interest if the rate is the same as the mortgage. If the HELOC rate is higher, you will lose money every time. I saw some comments from people that have it correct that this method will not save you money.
Unfortunately that is incorrect. Let me ask you this, how much interest does a credit card charge? If you answered roughly 20% or whatever your rate is you are both correct, and incorrect at the same time. This is because interest only accrues on any remaining balance after the due date has past. Therefore if you pay your account in full each billing cycle you will never pay a dime in interest but if you let the balance carry forward each month you pay the full 20%.
Likewise a heloc can be both more expensive, and cheaper depending how you use it. This method (if set up properly) can theoretically save you some money because the overwhelming majority of the time your heloc is at 0 balance, and therefore is not accumulating any interest. A mortgage might only be at a 4% rate, but if done properly a heloc at 6% can be cheaper because of the way the interest is calculated. Helocs only accrue interest during the timeframe that you have drawn against the heloc, and with the velocity strategy you would move ALL of your bills to the 28th of the month so that you only have a draw on your account for a maximum of 3 days out of every month and then you would fully pay off your heloc each month. If done in this manner, your heloc is only accruing interest on 3 out of 30ish days, so your effective interest rate would be closer to 0.6% and not the full 6%. If done in this manner it's not difficult to see that a 0.6% interest loan is better than a 4% interest loan.
To illustrate how it works lets say you earn 5k / month. Typically this means on the first of the month your bank balance spikes to 5k, and over the course of the next 30 days you spend and pay bills as they come due and your bank balance slowly drops with each bill that you pay until the end of the month where your balance is close to 0. Then the next month begins and you get paid again and your bank balance spikes back up to 5k and the process repeats itself.
Under the heloc method, you would first contact everyone that you owe money to and change the bill due date to the 28th of the month. This way your cell phone bill, credit card bill, cable bill, etc are all due on the 28th (changing the due date is different than simply deciding to pay the bill on the 28) Then you would instead put that initial 5k directly towards paying your mortgage so that you have $0 in the bank. Throughout the month you are now spending no money since you have no bills to pay, any random expenses such as gas or groceries are put on a credit card which you don't have to pay until the 28th of the following month. When the 28th of the month does come around, you take a draw of 5k against your heloc to pay off all of your bills, and that money will then stay on your heloc for the next 3 days until the first of the month when you get paid and you use that money to pay off your entire heloc and you rinse and repeat the process. Doing it this way you turned 5k worth of mortgage debt at 4% interest into 5k worth of heloc debt at essentially 0.6% since you only paid interest for 3 days, therefore saving a few dollars in the process.
While the strategy does theoretically work, it is not without it's many flaws and overall it probably isn't going to be worth it. It takes a fair amount of work to get the routine set up and change each and every one of your bills such that it's due date is the 28th. Do you really want to call up your cell phone company and every other company you have a bill with and have them move your bill due date to the latest allowable day of the month which is the 28th? Even with all of this work it only shaves off roughly 2-3 years from a typical mortgage if I remember my math correct assuming you earn 10k / month (you can find the math earlier in this thread). This is because since you have to fully pay off the heloc each month (if a balance carries over then you are correct, a 4% mortgage would beat paying the full 6% on a heloc) the amount that you draw on your heloc is limited by your monthly salary. Most people don't earn anywhere near enough money each month to make the technique worthwhile. After all, if you could switch a million dollar loan from 4% to 0.6% that would be amazing, but changing 5 or 10k worth of your mortgage into a heloc isn't going to revolutionize your world, especially after accounting for the annual heloc fees, and the hassle of setting it up.
Instead of spending countless hours reading and learning about the intricacies of this strategy and implementing it, I would suggest putting in one extra hour of month of overtime at your job and pay down your mortgage by that amount and achieve the same overall result of shaving 2-3 years off your term.
In short, the method CAN work, but not well enough to make it worthwhile.