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?

Brian CardwellPro Member

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

8y

Originally posted by @Joe Splitrock:

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.

@Joe Splitrock

I am not going to go down this rabbit hole with you again. I don't believe anyone has said that anyone HAS to use a HELOC to do this, but it absolutely made it more comfortable for ME and a minimal cost. Heloc or another LOC it doesn't matter.

1 Reply

Sean Cole

Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes

8y

Has anyone addressed the fact that HELOC interest is no longer tax deductible?

1 Reply

Edward B.

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

8y

Originally posted by @Sean Cole:

Has anyone addressed the fact that HELOC interest is no longer tax deductible?

I believe it is still tax deductible up to $100k depending on what you use it for.

0 Reply

Brian CardwellPro Member

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

8y

Originally posted by @Edward B.:

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.

I actually agree that it is somewhat psychological but if it helps one get out of debt, then I am for it.

0 Reply

Edward B.

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

8y

Originally posted by @Brian Cardwell:

Originally posted by @Edward B.:

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.

I actually agree that it is somewhat psychological but if it helps one get out of debt, then I am for it.

For sure, especially if your goal is to payoff your mortgage. I just don't happen to agree with paying off your mortgage.

Thereare lots of different ways to play this game and the great thing about it is that we can all play by or own rules and do just fine. But don't play by someone else's rules if you don't fully understand the game they are playing.

1 Reply

Sean Cole

Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes

8y

Originally posted by @Edward B.:

Originally posted by @Sean Cole:

Has anyone addressed the fact that HELOC interest is no longer tax deductible?

I believe it is still tax deductible up to $100k depending on what you use it for.

Nope. That was 2017.

You'd have to show you used the money to make substantial improvements to your home AND be under a total of $750k between your 1st and HELOC.

0 Reply

Brian CardwellPro Member

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

8y

Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

So yes you can still take it as a deduction as long as it qualifies. So as the rule is written one could use a HELOC in the first position because you are using it to purchase your home. One can also use a HELOC in to pay down their first mortgage because it is being used to purchase your house.

0 Reply

Shiloh LundahlPro Member

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

8y

So after reading more about the explaination of the velocity of money. And after going to a presentation on it the other day, it doesn’t seem as awesome as it appeared to me at first.

Basically it is putting an extra 2k on the house payment a month. I think that this strategy is great if the goal is the get out of debt, however, if my goal is the build my portfolio and create cash flow, then a better plan for me might be to learn how to manage debt and leverage debt by learning to access more private money or lines of credit to purchase more properties that create more cash flow. Over time my tenants can pay off my debt and I still own the property. Also, I am less of a target for law suites when I have my properties leveraged then when I have them paid off.

Let me know if my thinking is off somewhere.

480-206-1209 Podcast Guest on Show #287

3 Reply

Brian CardwellPro Member

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

8y

Sounds spot on dude

0 Reply

Account Closed

Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes

8y

All this talk about paying off your home mortgage might distract people from what they should do first. This should not even be considered unless they have ZERO higher interest debt and a reserve fund for emergencies.

Home mortgage debt is one of the cheapest kinds you can have.

4 Reply

Susan Homeier

Chicago, IL · Member since 2018 · 8 posts · 0 votes

8y

doesn't this only work if the LOC or HELOC is a rate lower than the other debt that you are paying off?

0 Reply

Sean Cole

Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes

8y

Originally posted by @Brian Cardwell:

One can also use a HELOC in to pay down their first mortgage because it is being used to purchase your house.

That's interesting logic, but I think it's clearly outside the bounds of the Act. Paying down a mortgage isn't the same as purchasing the house. By your logic, a principal payment on the mortgage would always be tax deductible and it's clearly not.

1 Reply

Allison Yu

Boston, MA · Member since 2018 · 1 post · 3 votes

8y

I was surprised how many people posting here don't understand this strategy. The best way to understand velocity banking is to create a spreadsheet and build your own mortgage amortization table. Then you plug in the extra payments from either HELOC or personal line of credit. Meanwhile, build another table to calculate how much interest you're paying by using the line of credit. You need to truly understand the concept of APR first before doing so. Simple cost and benefit analysis.

However, there are things to watch out here. First, you need to have a positive cash flow. Say your paycheck is 10k you can't spend 15k per month. Second, you need to be good with number and understand credit. Someone needs to manage both the mortgage and the line of credit, not to mention other credit cards and bank accounts.

Remember, positive cash flow is the king.

3 Reply

Jeff Feldman

Member since 2018 · 7 posts · 12 votes

8y

It sounds like you're trying to lower the effective rate because you put a whole paycheck into the loc n pay for the mortgage. Then you pay bills with the loc, but because you're spreading them out over the month your only spending interest for the average of how long they've been in there. The faster you pay them off the lower the effective rate and the slower the higher. Which is why it doesn't make sense to me to put 10k in at a time when it takes a year to pay off as youre paying the full interest rate.

0 Reply

Scott Kennedy

Investor · Stilwell, KS · Member since 2015 · 7 posts · 1 vote

8y

I do something similar except I use credit cards for 3 percent transfer fee, 18 months zero interest. I borrow whatever amount I can safely pay back in 18 months and throw it at the mortgage to save on interest. I saved over 6000 in interest on 30k student loan debt.

1 Reply

Rich Weatherford

Member since 2018 · 3 posts · 1 vote

8y

I am a Kellogg Northwestern grad and we learned a similar technique in business school... My mom recently wanted to increase her income and have a house paid off for every grandchild she has so it turns out that velocity banking was the right tool for her...

Now to respond to some negative comments I have seen posted on velocity banking... I think the one item that the people who are negative about velocity banking are missing a key point... First of all it is just a tool and shouldn't be viewed as "negative" as it is a just a tool... The difference between between conventional mortgages and lines of credit are that the bank has a long guaranteed cash flow from your conventional loan while your payments on your HELOC reduce the banks cash flow every time your pay it down... When I run companies,we work off "revolvers" or basically lines of credit.... so if the "conventional" mortgage was such a great debt instrument,why do you think the smartest folks in business don't use them?

The one really good point that was brought up in a "negative" response was that paying off you mortgage in that short of time could have lost opportunity cost... Good Point... I helped my mother work through the calculations and it turns out that she is better off right now buying the next cash flow property which she is netting about $400 to $500 in positive cash flow on her current deal profile... her payoff is only adds about $351 on her best property due to very low interest payments... best of luck and they are very effective tools to learn for specific use... As they say its not either/or one versus the other... "and" is better and you can mix the loans as appropriate for best results... until her cash flow property opportunity drops below $351 then she will continue purchase rather than pay down existing... best of luck and she 5 properties to date... Go Mom! love the community her and we did sign up for PRO... Thanks BiggerPockets

1 Reply

Bill F.

Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes

8y

@Rich Weatherford what rates on their revolvers are the companies you run getting?

Also for purposes of this discussion, paying off long term debt, bonds and mortgages are essentially the same thing.

0 Reply

Rich Weatherford

Member since 2018 · 3 posts · 1 vote

8y

I was under NDA and an officer of the company for the private family when I was working for as COO at Arrowhead Products as well Crane electronics so I can't discuss... I can tell you about the LOC we're currently in negotiations with a community bank... It looks like variable prime plus one depending on how much we take right away... I'm open to other sources... I would even consider a little higher rate to avoid the bureaucracy of the bank and have better flexibility...

0 Reply

Cliff T.

Rental Property Investor · San Francisco, CA · Member since 2016 · 215 posts · 42 votes

8y

I'm still trying to wrap my head around all this but I think the salient points are these:

1. Total debt still remains the same regardless if you use the HELOC or not; this strategy is essentially moving money around from one loan to another and doesn't "magically" pay off one's loan more quickly; the reason why folks are commenting that their loan was paid off in X years is because they made additional principal payments

2. The strategy of simply paying off your first loan principal directly (without HELOC) should achieve the same result; however, with this strategy, you run the risk of having less cash on hand. If that's an issue, one can simply pull from the HELOC when he/she NEEDS the cash

To sum up, the only benefit to using the HELOC and applying it towards velocity banking, is that your entire cash balance is constantly working towards paying down principal (and thus, total interest). This would have the exact same effect if you paid down principal early each month with all your cash (but with this method, you run the risk of not having cash on hand when needed to pay bills, etc.)

2 Reply

Cliff T.

Rental Property Investor · San Francisco, CA · Member since 2016 · 215 posts · 42 votes

8y

Originally posted by @Scott L.:

Let's say your mortgages are calculated monthly and HELOCS are compounded daily. Fine, its really a small point with daily or monthly compounding. If you run a calculator as if you're the bank, you'll find it makes a couple percent difference in the total interest paid (received by the bank) over the course of the loan. If you pay $3000 on your first lien HELOC on the first, then borrow back $1500 of it to pay your bills on the 15th. You save 15 days of interest on $1500 at say 5%...So you save $3.12. If you do it every month for 30 years it saves you $1125 over the 30 years. Not even a full payment. So this helps you pay it off in 7 years how?

The only difference with a regular mortgage is you can't "borrow back" an advance payment of principal to pay your bills later in the month. And on the "monthly" vs. daily calculation, ask your bank when they credit an early principal payment for the calculation of interest...On the date it's received....or at the end of the month it's received? Even if they waited it's still only a difference of the interest on that payment for one month. So a couple dollars. There was a long thread on this method a couple years ago. Someone finally did a "daily cash flow" spreadsheet with assumptions described in these plans for a 30 year mortgage payoff. The result was it paid off a month or two early assuming no additional early principal payments. The monthly/daily interest calculation and amortization differences are negligible. There are two ways to pay off a loan faster. Get a lower interest rate. Pay more principal sooner.

I paid of my 200,000 7% mortgage originated in 1998 in two years. How? By paying extra principal instead of investing it in Internet stocks like my colleagues. They laughed at my 7% return, until they didn't...

Hey Scott,

One important point that your math omitted: you need to compound the interest on the "savings " that you noted in your first paragraph. In your example, the savings would be much greater than $3.12 bc that would be compounded over the life of the loan (e.g. 10, 20, or even 30 more years).

A simple way to think about it: if I have a 10 year loan for $1000 that I take out today and tomorrow, pay it off completely while it only accrues $1 in interest, my "savings" is much more than that $1. I wouldn't tell my friends that I "saved" $1 by paying off my loan early. I've effectively "saved" on all interest payments on the $1000 principal for the next 10 years.

To be clear, I'm not advocating for velocity banking and like many of you, I'm just starting to research & understand the topic before deciding if it's the right thing for me. It does look like it has some merits, although folks need to understand that it's not doing anything special (i.e. direct principal pay down with all your monthly cash surplus would do the exact same thing, and perhaps even better bc you wouldn't be paying interest on the HELOC). I'm actually nervous at all the advocates here who are posting it as "it just works" without being able to articulate the math and mechanics behind the strategy.

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Scott L.

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

8y

Originally posted by @Cliff T.:

Originally posted by @Scott L.:

Let's say your mortgages are calculated monthly and HELOCS are compounded daily. Fine, its really a small point with daily or monthly compounding. If you run a calculator as if you're the bank, you'll find it makes a couple percent difference in the total interest paid (received by the bank) over the course of the loan. If you pay $3000 on your first lien HELOC on the first, then borrow back $1500 of it to pay your bills on the 15th. You save 15 days of interest on $1500 at say 5%...So you save $3.12. If you do it every month for 30 years it saves you $1125 over the 30 years. Not even a full payment. So this helps you pay it off in 7 years how?

The only difference with a regular mortgage is you can't "borrow back" an advance payment of principal to pay your bills later in the month. And on the "monthly" vs. daily calculation, ask your bank when they credit an early principal payment for the calculation of interest...On the date it's received....or at the end of the month it's received? Even if they waited it's still only a difference of the interest on that payment for one month. So a couple dollars. There was a long thread on this method a couple years ago. Someone finally did a "daily cash flow" spreadsheet with assumptions described in these plans for a 30 year mortgage payoff. The result was it paid off a month or two early assuming no additional early principal payments. The monthly/daily interest calculation and amortization differences are negligible. There are two ways to pay off a loan faster. Get a lower interest rate. Pay more principal sooner.

I paid of my 200,000 7% mortgage originated in 1998 in two years. How? By paying extra principal instead of investing it in Internet stocks like my colleagues. They laughed at my 7% return, until they didn't...

Hey Scott,

One important point that your math omitted: you need to compound the interest on the "savings " that you noted in your first paragraph. In your example, the savings would be much greater than $3.12 bc that would be compounded over the life of the loan (e.g. 10, 20, or even 30 more years).

A simple way to think about it: if I have a 10 year loan for $1000 that I take out today and tomorrow, pay it off completely while it only accrues $1 in interest, my "savings" is much more than that $1. I've effectively "saved" on all interest payments on the $1000 principal for the next 10 years.

My mistake was saying compounded instead of calculated. All standard mortgages are simple interest and they apply principal payments the day they are received. They calculate interest daily on the outstanding balance same as a HELOC. They just have required fixed payments, and you can't borrow back the money that you paid in early.

The difference between a HELOC and a mortgage at the same interest rate is negligible. There is ONE way to pay off a loan faster. Pay the principal sooner. That's it. Which begs the question of where you get the money to pay the principal faster. Perhaps the HELOC strategy helps you psychologically to manage your money better. So you spend less money and pay more towards principal every month. Great but that isn't magic, just math. :-)

2 Reply

Brian CardwellPro Member

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

8y

The fact of paying more towards your principle to payoff ones loan early is accurate. The question here is how are you going to do it? Are you going to use your own cash or OPM. I choose to use OPM. Why? So I didnt have to dip into my cash reserves. Also so I could use the extra money I had during the month to pay towards the principle and still have access to it. It's not magic, it's math.

1 Reply

Costin I.

Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes

8y

@Scott L. There is a difference between a standard mortgage and HELOC - The standard mortgage in the US accrues interest monthly, meaning that the amount due the lender is calculated a month at a time. There are some rare mortgages, however, on which interest accrues daily.

Interest on a HELOC is calculated daily rather than monthly, and that can make a substantial difference if used properly (you place all your incoming deposits in the HELOC).

1 Reply

Scott L.

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

8y

Originally posted by @Costin I.:

@Scott L. There is a difference between a standard mortgage and HELOC - The standard mortgage in the US accrues interest monthly, meaning that the amount due the lender is calculated a month at a time. There are some rare mortgages, however, on which interest accrues daily.

Interest on a HELOC is calculated daily rather than monthly, and that can make a substantial difference if used properly (you place all your incoming deposits in the HELOC).

This is a common misunderstanding. If you send additional payment to a standard mortgage the balance for calculating interest is updated the day the payment is cleared.

1 Reply

Costin I.

Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes

8y

@Scott L., when is the interest recalculated? The day you make that additional payment or at the end of the month?

1 Reply

Has anyone ever used the Velocity Banking Strategy?

Has anyone ever used the Velocity Banking Strategy?

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