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?

Elizabeth Butenko

Redmond, WA · Member since 2018 · 2 posts · 4 votes

8y

My husband and I crunched the numbers over the long term and found a better use of our money. Because this strategy requires you to have a positive monthly cash-flow... we compared what you would save with this method vs. what you could make by investing the extra cash. We determined (for us) that if we invested in anything with a 6% or greater return that we would make more over the same amount of time than we would save using velocity banking.

This is a good strategy if you are just putting your extra cash into a savings account and not making it work for you. However there are ways to make it work even harder!

4 Reply

Albert Bui

Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes

8y

Velocity banking is the new marketing spin name for Home ownership acceleration from the 2006-2011 era now repackaged into velocity banking.

1 Reply

David Dachtera

Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes

8y

Originally posted by @Scott L.:

Originally posted by @David Dachtera:

Originally posted by @Scott L.:

Originally posted by @Brandon Schlichter:

Someone told me about this 'amazing trick'.

But here's my question - Aren't ALL Mortgages calculated on daily interest? I'm pretty sure all the mortgages I have use a daily interest rate, and if you make pre-payments in a specific way (Assigned to either interest or principal) you can attack your interest rate just as quickly and there's no need for software, a HELOC or anything like that.

Correct. There's nothing magic about this strategy. The only way you come out ahead is to pay lower interest on one of the loans, pay more principal down on mortgage early by using a HELOC for cash flow, or some combination thereof. The rest of it is hokum. If you pay me $17,000 I will tell you how all this work. :-)

Actually, home loans - whether they're secured by a mortgage or a Deed of Trust - are amortized loans. You probably got an amortization schedule at closing. That tells you how much of each payment goes to principal and how much to interest if you make only the minimum scheduled payment.

Accelerate that pay back and your position in the amortization schedule moves based on how much principal you have paid beyond the minimum scheduled payment. That is, really, the key to reducing interest paid: accelerate the principal repayment.

By the way ... telling how to do it is "free" here on BP. Clearing up misunderstandings, misinterpretations and misconceptions is where the "$17,000" comes in ;-) .

The amortization schedule is provided by the bank to illustrate the amount of the payment toward principal and interest from each payment if paid on exactly the due date. For payments received earlier or later, the amount of interest paid will vary slightly based on the date of receipt and other factors. The only way to pay off a mortgage faster is to pay less interest or more principal than required by the amortization schedule. If you finance these additional payments, through whatever mechanism....a HELOC, 0% credit cards, my secret $17,000 plan, there's no way to pay off faster without refinancing at a lower interest rate or paying more principal sooner. With current interest rates the "float" on a HELOC from immediately depositing funds to it and paying bills from it when due is not really going to save you a lot. This is simply the business concept of reducing cash on hand/working capital to the minimum necessary to maintain your obligations. Since us little guys don't have access to the commercial paper markets and guaranteed lines of credit (HELOCS can be frozen), we're really safer keeping cash on hand and foregoing the (negligible) interest savings in return for peace of mind. No one yet has come up with a way to pay a mortgage faster without paying more principal earlier than required, which of course begs the question of where this additional cash comes from.... ;-)

Quite true, Scott.

This is not effective for those living paycheck to paycheck or who have more month left at the end of the money.

It is really only effective for people who are already managing their finances responsibly.

2 Reply

Brian CardwellPro Member

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

8y

Originally posted by @DeShawn Smith:

Originally posted by @Brian Cardwell:

Originally posted by @Account Closed:

I have a small problem. My bank will not allow me to use my LOC for my Bill pay. How do I work around that?

So you can handle this by transferring the money from the LOC to your checking account for your bills. Just make sure that you leave the excess in the HELOC.

This would be a 2nd Lien HELOC correct? In this case will you still be as effective as a mortgage in the 1st Lien?

I've read that the 1st lien are "safer" for you and the lender but can you achieve the same results w/o being in the 1st position?

Also, would you mind explaining what the excess left into the HELOC dose and how it works?

For example, you have 30K available but draw 20K ... what is that extra 10K doing while sitting inside your LOC?

Thanks in advance for your time.

@DeShawn Smith

I think i may not be being clear. I will try to keep it simple.

Basic facts :

Primary mortgage. Equals 200k

Salary equals 5k.

Total monthly expenses equals 3k

HELOC equals 20k in second position

So lets start this off.

First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage.

First mortgage = 190k

Heloc= 10k balance

Month 1

Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC.

HELOC= 5k balance

Now let's pay your expenses from your HELOC.

HELOC = 8k balance 5k(balance)+3k(expenses)

Month 1 balance

Primary mortgage 190k owed

HELOC 8k owed

Total debt 198k owed

Month 2

Put the entire paycheck in the HELOC

HELOC balance 3k owed (8k-5k)

Pay expenses of 3k

Mortgage Balance 190k

HELOC balance of 6k owed (3k+3k)

Total debt is 196k

Month 3

Pay expenses 3k

HELOC =9k

Put entire check in the HELOC

HELOC = 4k

Mortgage Balance owed 190k

HELOC = 4k

Total owed 194k

Rinse and repeat......

In month 5 your heloc balance owed will be 0.

Month 6

So in month 6 you put 10k from your heloc on the principle of your primary mortgage.

Primary mortgage Balance 180k.

HELOC balance is 10k

Total owed is 190k

Put your entire paycheck in the HELOC

HELOC balance. 5k

pay your expenses 3k

HELOC balance is 8k

Primary mortgage Balance is 180k

Total debt 188k

Month 7

Put entire paycheck in the HELOC 5k

HELOC = 3k

Pay your expenses 3k

HELOC balance is 6k

Mortgage Balance is 180

Total debt is 186k

At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash.

Rinse and repeat until your debt is gone

It really is that simple.

The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

To answer your question ... I don't know I have not done the numbers with the HELOC being in the 1st position. I did mine using the HELOC in the second position. Concerns about the bank freezing the HELOC. I personally worried about it as much as I worried about an asteroid hitting the planet and wiping out mankind.

As far as asking a banker about this ...well it isn't in their best interest to know or to tell you about this. Pun was intended. So you may look to them as experts but most of them are clueless when it comes to thinking out of the box.

Disclaimer:

So I am not a financial advisor and I didn't stay at a holiday in last night. I worked for me. That is all I can say.

8 Reply

DeShawn Smith

Investor · Dayton, OH · Member since 2017 · 9 posts · 1 vote

8y

Originally posted by @Brian Cardwell:

Originally posted by @DeShawn Smith:

Originally posted by @Brian Cardwell:

Originally posted by @Account Closed:

I have a small problem. My bank will not allow me to use my LOC for my Bill pay. How do I work around that?

So you can handle this by transferring the money from the LOC to your checking account for your bills. Just make sure that you leave the excess in the HELOC.

This would be a 2nd Lien HELOC correct? In this case will you still be as effective as a mortgage in the 1st Lien?

I've read that the 1st lien are "safer" for you and the lender but can you achieve the same results w/o being in the 1st position?

Also, would you mind explaining what the excess left into the HELOC dose and how it works?

For example, you have 30K available but draw 20K ... what is that extra 10K doing while sitting inside your LOC?

Thanks in advance for your time.

@DeShawn Smith

I think i may not be being clear. I will try to keep it simple.

Basic facts :

Primary mortgage. Equals 200k

Salary equals 5k.

Total monthly expenses equals 3k

HELOC equals 20k in second position

So lets start this off.

First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage.

First mortgage = 190k

Heloc= 10k balance

Month 1

Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC.

HELOC= 5k balance

Now let's pay your expenses from your HELOC.

HELOC = 8k balance 5k(balance)+3k(expenses)

Month 1 balance

Primary mortgage 190k owed

HELOC 8k owed

Total debt 198k owed

Month 2

Put the entire paycheck in the HELOC

HELOC balance 3k owed (8k-5k)

Pay expenses of 3k

Mortgage Balance 190k

HELOC balance of 6k owed (3k+3k)

Total debt is 196k

Month 3

Pay expenses 3k

HELOC =9k

Put entire check in the HELOC

HELOC = 4k

Mortgage Balance owed 190k

HELOC = 4k

Total owed 194k

Rinse and repeat......

In month 5 your heloc balance owed will be 0.

Month 6

So in month 6 you put 10k from your heloc on the principle of your primary mortgage.

Primary mortgage Balance 180k.

HELOC balance is 10k

Total owed is 190k

Put your entire paycheck in the HELOC

HELOC balance. 5k

pay your expenses 3k

HELOC balance is 8k

Primary mortgage Balance is 180k

Total debt 188k

Month 7

Put entire paycheck in the HELOC 5k

HELOC = 3k

Pay your expenses 3k

HELOC balance is 6k

Mortgage Balance is 180

Total debt is 186k

At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash.

Rinse and repeat until your debt is gone

It really is that simple.

The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

To answer your question ... I don't know I have not done the numbers with the HELOC being in the 1st position. I did mine using the HELOC in the second position. Concerns about the bank freezing the HELOC. I personally worried about it as much as I worried about an asteroid hitting the planet and wiping out mankind.

As far as asking a banker about this ...well it isn't in their best interest to know or to tell you about this. Pun was intended. So you may look to them as experts but most of them are clueless when it comes to thinking out of the box.

Disclaimer:

So I am not a financial advisor and I didn't stay at a holiday in last night. I worked for me. That is all I can say.

Super clear, thank you for your time and patience.

0 Reply

Brian CardwellPro Member

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

8y

Originally posted by @DeShawn Smith:

Originally posted by @Brian Cardwell:

Well either way YOU spin it . I paid off my $252k mortgage in less than 7 years

In so many other forms I have seen the BP community provide guidance "details" and I can't help but wonder on why not the same level of openness on this one.

I have personally been researching this method for months and have called more than 20 different banks to learn more... I've even developed up a checklist that I'll share if anyone want's it/and will add to it... I guess I'll just keep researching because although I'd like to take the step I can't see myself refinancing into a 1st Lien w/o knowing exactly how to execute for success.

If there are any books or information you or others are willing/able to share I'm standing by.

So for refinancing into a first position HELOC . One could use the heloc just as one would use a bank acct. The money that you have above and beyond your monthly income stays in the first position HELOC while at the same time lowers your principle. The beauty of this is every bit of your income that you are putting towards that first position HELOC is still excessable. All mortgages should be like this. Oh wait prior to when the federal reserve came into existence, they were.

Oh but it is variable. So what! interest rates have never historical gone up super fast. You will still be ahead of the game even if it does go up.

0 Reply

Brian CardwellPro Member

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

8y

Originally posted by @DeShawn Smith:

Originally posted by @Brian Cardwell:

Originally posted by @DeShawn Smith:

Originally posted by @Brian Cardwell:

Originally posted by @Account Closed:

I have a small problem. My bank will not allow me to use my LOC for my Bill pay. How do I work around that?

So you can handle this by transferring the money from the LOC to your checking account for your bills. Just make sure that you leave the excess in the HELOC.

This would be a 2nd Lien HELOC correct? In this case will you still be as effective as a mortgage in the 1st Lien?

I've read that the 1st lien are "safer" for you and the lender but can you achieve the same results w/o being in the 1st position?

Also, would you mind explaining what the excess left into the HELOC dose and how it works?

For example, you have 30K available but draw 20K ... what is that extra 10K doing while sitting inside your LOC?

Thanks in advance for your time.

@DeShawn Smith

I think i may not be being clear. I will try to keep it simple.

Basic facts :

Primary mortgage. Equals 200k

Salary equals 5k.

Total monthly expenses equals 3k

HELOC equals 20k in second position

So lets start this off.

First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage.

First mortgage = 190k

Heloc= 10k balance

Month 1

Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC.

HELOC= 5k balance

Now let's pay your expenses from your HELOC.

HELOC = 8k balance 5k(balance)+3k(expenses)

Month 1 balance

Primary mortgage 190k owed

HELOC 8k owed

Total debt 198k owed

Month 2

Put the entire paycheck in the HELOC

HELOC balance 3k owed (8k-5k)

Pay expenses of 3k

Mortgage Balance 190k

HELOC balance of 6k owed (3k+3k)

Total debt is 196k

Month 3

Pay expenses 3k

HELOC =9k

Put entire check in the HELOC

HELOC = 4k

Mortgage Balance owed 190k

HELOC = 4k

Total owed 194k

Rinse and repeat......

In month 5 your heloc balance owed will be 0.

Month 6

So in month 6 you put 10k from your heloc on the principle of your primary mortgage.

Primary mortgage Balance 180k.

HELOC balance is 10k

Total owed is 190k

Put your entire paycheck in the HELOC

HELOC balance. 5k

pay your expenses 3k

HELOC balance is 8k

Primary mortgage Balance is 180k

Total debt 188k

Month 7

Put entire paycheck in the HELOC 5k

HELOC = 3k

Pay your expenses 3k

HELOC balance is 6k

Mortgage Balance is 180

Total debt is 186k

At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash.

Rinse and repeat until your debt is gone

It really is that simple.

The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

To answer your question ... I don't know I have not done the numbers with the HELOC being in the 1st position. I did mine using the HELOC in the second position. Concerns about the bank freezing the HELOC. I personally worried about it as much as I worried about an asteroid hitting the planet and wiping out mankind.

As far as asking a banker about this ...well it isn't in their best interest to know or to tell you about this. Pun was intended. So you may look to them as experts but most of them are clueless when it comes to thinking out of the box.

Disclaimer:

So I am not a financial advisor and I didn't stay at a holiday in last night. I worked for me. That is all I can say.

Super clear, thank you for your time and patience.

No problem glad to help😁

0 Reply

James Kendrick

Investor · New York, NY · Member since 2015 · 43 posts · 29 votes

8y

@Renee Bridwell perhaps you could post the name of some lending institutions that offer 1st lien HELOCs on any type of property. If such a product is available I think many of us could benefit from that information.

0 Reply

Brian CardwellPro Member

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

8y

@James Kendrick

I have my first position HELOC with Tower Federal credit Union. I would think that many other banks would do this if you ask them.

0 Reply

Steve L.

Fairfield, CA · Member since 2016 · 29 posts · 22 votes

8y

@James Kendrick Navy fed worked well for me being a USMC vet. My objective hasn’t been to pay off my home, but to pay down my home to rapidly save up for additional down payments and reserves, while keeping as much control over my additional principal payments. The reward miles come in handy having two daughters in travel volleyball. I’m not really into the the argument over interest rate, just the volume of it leaving my account. All I know is I pay the same amount I would for an amortized loan over the minimum interest only payment and every month my minimum interest payment goes down and more goes to principal. When I sat down and looked at how much I’ve paid for the convenience of the bank storing my money for me, I almost passed out. For me, I was able differentiate the difference between the strategy vs a company offering it. I will say, it’s not for everyone and everyone has to gauge their appetite for risk. I only do this with one of my properties to reduce my exposure. Everyone has their own strategy, I have mine.

0 Reply

Vinayraj Pillai

Maricopa, AZ · Member since 2014 · 1 post · 1 vote

8y

I just closed on a first lien position HELOC with Desert Financial Credit Union in Arizona. 2.99% for the 1st year.

1 Reply

Shiloh LundahlPro Member

Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

8y

@Brian Cardwell I just looked at your explaination and I appreciate you taking the time to write it out, but I didn't see any of the 10k going towards interest. Also, it looked like there was 2k a month extra. Couldn't you have just applied that towards the principle and have gotten the same effect without needing to use the HELOC?

480-206-1209 Podcast Guest on Show #287

2 Reply

Brian CardwellPro Member

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

8y

Originally posted by @Shiloh Lundahl:

@Brian Cardwell I just looked at your explaination and I appreciate you taking the time to write it out, but I didn't see any of the 10k going towards interest. Also, it looked like there was 2k a month extra. Couldn't you have just applied that towards the principle and have gotten the same effect without needing to use the HELOC?

The 10k doesn't go to the interest. It goes towards the principle. The 2k represents the amount of money left over for the month. That money stays in the HELOC.

Direct answer to your question is "yes". You could have done that. Here is why I didn't. I didn't because I wanted to still have access to that 2k if I needed it. By using the heloc it allowed me to still have access to that 2k each month.

There will be those who say it doesn't make sense to do that. It did/does make sense to me and my mortgage was paid off in less than 7years. I also now have a line of credit to pull from if I want. Plus my credit score benefited from it too.

3 Reply

Brian CardwellPro Member

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

8y

Originally posted by @Vinayraj Pillai:

I just closed on a first lien position HELOC with Desert Financial Credit Union in Arizona. 2.99% for the 1st year.

@Vinayraj Pillai

Congratulations! Use it wisely.

0 Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

In this scheme, aren't you then basically paying interest on your own cash in the bank? Instead of using cash that you already have to accelerate your mortgage, you are using a HELOC, which you pay interest on....

0 Reply

Brian CardwellPro Member

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

8y

Nope to the question. I spent less than 75 dollars a month to save 135k in interest and still have my access to my extra money monthly

0 Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

@Brian Cardwell what did you spend $75 per month on?

0 Reply

Brian CardwellPro Member

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

8y

Interest from the HELOC.

0 Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

So then @Brian Cardwell, aren't you just paying $75/mo interest to have access to your own cash? How would your result change if you used your cash instead of the HELOC? I try to wrap my head around how this saves any money. You have to pay down principal to save interest, so paying interest on the money your using to pay principal seems counter productive. Maybe I need to do more research because it's intriguing, but seems like a strange way to go about it.

1 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

8y

Man, this is for sure Groundhog Day!

Podcast Guest on Show #243

Skyline Properties

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2 Reply

Brian CardwellPro Member

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

8y

Originally posted by @Jason D.:

So then @Brian Cardwell, aren't you just paying $75/mo interest to have access to your own cash? How would your result change if you used your cash instead of the HELOC? I try to wrap my head around how this saves any money. You have to pay down principal to save interest, so paying interest on the money your using to pay principal seems counter productive. Maybe I need to do more research because it's intriguing, but seems like a strange way to go about it.

You could just throw your extra cash at the principle. Once you do that, you no longer have that cash. If you use the heloc you will still have access to your money if needed. To have access it will cost you the interest that you will owe on the balance of the HELOC.

I agree it does sound counter productive. I don't know how to make it sound productive other than saying it works and saved me over 130k and paid my home off in less than 7yrs.

Some will say I could have done it faster/ cheaper without the HELOC. The HELOC gave me some level of comfort which worked for me.

2 Reply

Don SpaffordPro Member

OP

Investor · Idaho Falls, ID · Member since 2016 · 912 posts · 629 votes

8y

From what I have understood about, it is that it moves your amortization schedule way ahead each time you make the large LOC payment so that each consecutive normal monthly payment is then automatically paying more toward principle rather than interest. By simply paying more each month, you do not get as large of an effect on this. the further ahead in your amortization you get, the larger percentage of your payment goes toward principle. So if you pay an extra $500/mo in your payment toward principle, over a year you maybe get 2-3 payments ahead. But by making a large payment of $10k, it jumps you YEARS ahead in your payment schedule which is why you then are able to pay it off this way in 7-10 years and the extra minimal interest you pay on the LOC is negligible for the overall savings you get from it. I admit, it is not for everybody and if it doesn't make sense to you then you should maybe stay away or do more research to understand it better. Mathematically, it makes sense. As others have said, you could possibly get better use from the money to invest in other properties, so you have to do your own due diligence and decide what is best for you.

2 Reply

Joe SplitrockPro Member

Moderator

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

8y

Originally posted by @Brian Cardwell:

Originally posted by @Shiloh Lundahl:

@Brian Cardwell I just looked at your explaination and I appreciate you taking the time to write it out, but I didn't see any of the 10k going towards interest. Also, it looked like there was 2k a month extra. Couldn't you have just applied that towards the principle and have gotten the same effect without needing to use the HELOC?

The 10k doesn't go to the interest. It goes towards the principle. The 2k represents the amount of money left over for the month. That money stays in the HELOC.

Direct answer to your question is "yes". You could have done that. Here is why I didn't. I didn't because I wanted to still have access to that 2k if I needed it. By using the heloc it allowed me to still have access to that 2k each month.

There will be those who say it doesn't make sense to do that. It did/does make sense to me and my mortgage was paid off in less than 7years. I also now have a line of credit to pull from if I want. Plus my credit score benefited from it too.

You could have just opened paid $2K extra to your mortgage every month and kept a revolving credit account open for emergencies, whether that be HELOC or credit card. Ultimately the HELOC isn't needed to pay off a mortgage faster. It is the extra principal payments that pay off the mortgage. Your HELOC and mortgage interest works out the same, assuming similar interest rate. I understand for you the HELOC made it easier, but it is not necessary and doesn't result in any faster pay off than just writing an extra principal check each month.

6 Reply

Joe SplitrockPro Member

Moderator

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

8y

Originally posted by @Don Spafford:

From what I have understood about, it is that it moves your amortization schedule way ahead each time you make the large LOC payment so that each consecutive normal monthly payment is then automatically paying more toward principle rather than interest. By simply paying more each month, you do not get as large of an effect on this. the further ahead in your amortization you get, the larger percentage of your payment goes toward principle. So if you pay an extra $500/mo in your payment toward principle, over a year you maybe get 2-3 payments ahead. But by making a large payment of $10k, it jumps you YEARS ahead in your payment schedule which is why you then are able to pay it off this way in 7-10 years and the extra minimal interest you pay on the LOC is negligible for the overall savings you get from it. I admit, it is not for everybody and if it doesn't make sense to you then you should maybe stay away or do more research to understand it better. Mathematically, it makes sense. As others have said, you could possibly get better use from the money to invest in other properties, so you have to do your own due diligence and decide what is best for you.

This is a major misconception (false claim in some Youtube videos) about using a HELOC to chunk payments. Let's say you make a $10K payment from your HELOC to your mortgage, you then owe $10K on your HELOC. If you were paying $500 per month to the HELOC, part of that would go towards interest and part towards principal. Let's say your HELOC rate is 5%. It will take 21 months to pay off the HELOC making $500 per month payments. Interest on mortgages and HELOC accrue the same way, so transferring debt to the HELOC results in the same interest being paid (assuming rates on the mortgage and HELOC are the same). Yes, you can pay off a mortgage faster, but only by making extra principal payments. There is no difference mathematically between using a HELOC to pay $10K and versus just paying $500 per month to your mortgage. All you are doing is transferring debt from one loan to another when you use the HELOC.

3 Reply

Edward B.

Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes

8y

Originally posted by @Don Spafford:

From what I have understood about, it is that it moves your amortization schedule way ahead each time you make the large LOC payment so that each consecutive normal monthly payment is then automatically paying more toward principle rather than interest. By simply paying more each month, you do not get as large of an effect on this. the further ahead in your amortization you get, the larger percentage of your payment goes toward principle. So if you pay an extra $500/mo in your payment toward principle, over a year you maybe get 2-3 payments ahead. But by making a large payment of $10k, it jumps you YEARS ahead in your payment schedule which is why you then are able to pay it off this way in 7-10 years and the extra minimal interest you pay on the LOC is negligible for the overall savings you get from it. I admit, it is not for everybody and if it doesn't make sense to you then you should maybe stay away or do more research to understand it better. Mathematically, it makes sense. As others have said, you could possibly get better use from the money to invest in other properties, so you have to do your own due diligence and decide what is best for you.

The issue is that you are transferring the interest that you would have been paying to the 1st mortgage on that $10k to paying interest on the HELOC for that $10k. It may be negligible depending on your HELOC terms, but it is almost certainly more than just applying those payments to the 1st mortgage in the first place without the more expensive HELOC. The question then becomes do you want to pay for the right to access that money again. I believe the general consensus is that this is mostly a psychological strategy that allows you to justify paying your mortgage down much faster than you otherwise would have, but it will cost you more.

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Has anyone ever used the Velocity Banking Strategy?

Has anyone ever used the Velocity Banking Strategy?

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