Originally posted by @Jim Tarwater:
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.