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.

@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).

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?

Scott L.

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

8y

It’s calculated on the day the next payment is due, but based on the daily principal balance throughout the previous month. You don’t think they spot you the extra interest if you pay later in the grace period? :-) . The amortization schedule that the bank gives you at beginning of the loan is valid only if you pay exactly on the due date for all 360 payments. If you have a web portal for your mortgage, you can validate that they use daily balances. I have 3 FNMA mortgages and have validated this many times. The monthly interest is calculated on the DAILY balance since the previous payment. If you make additional principal payments during the month it lowers the daily balance and hence interest. You don’t need a heloc to do this.

1 Reply

Don SpaffordPro Member

OP

Investor · Idaho Falls, ID · Member since 2016 · 935 posts · 629 votes

8y

The value of the velocity strategy comes from making the larger lump payments which jumps your payment schedule farther ahead and therefore each subsequent payment also is now paying more toward principal than interest. By only paying extra toward principal each month, you do not get the same effect. Yes, it will still pay it off sooner, but not as quickly and you would still pay more in interest over the life of the loan. By using this method properly, it would pay off the loan much sooner and save thousands in interest, even calculating for the heloc interest. But that is only if it is used properly. It is not simply taking out a loan to pay on another loan. If used properly the heloc balance due would essentially be close to 0 since you are moving money in and out each month and therefore the average daily balance is creating minimal interest.

1 Reply

Scott L.

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

8y

You pay off big chunks of the primary mortgage with what? A HELOC which immediately begins accruing interest also? Your whole paycheck at the beginning of the month, then you draw on your LOC to pay bills until the next paycheck? The only way to pay off a given amount faster and with less interest is to pay more principal sooner than it is due per the amortization schedule. You can play hide the ping pong ball under the cups, but at the and of the day, you have to come up with more principal sooner. There are psychological advantages perhaps, and maybe transaction timing buys you a few dollars, once. But the strategy does not get around the laws of math.

2 Reply

Brian CardwellPro Member

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

8y

There is no question about the fact that you have to pay the principle down. Again the question is how it is done. Some want to use their extra cash and throw it on the primary mortgage and not have easy access to it. Others like to use OPM, HELOC, to accomplish the same thing and still have access to there extra monthly cash.

0 Reply

Scott L.

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

8y

Originally posted by @Brian Cardwell:

There is no question about the fact that you have to pay the principle down. Again the question is how it is done. Some want to use their extra cash and throw it on the primary mortgage and not have easy access to it. Others like to use OPM, HELOC, to accomplish the same thing and still have access to there extra monthly cash.

Absolutely correct. This is the best case for the "Velocity" strategy. You just have to remember that the OPM (LOC) has a cost as well. Sometimes it's lower for an initial period than a mortgage, but many times it is higher.

1 Reply

Gary Floring

Bremerton, WA · Member since 2018 · 49 posts · 35 votes

8y

There are several threads on using HELOCs to quickly pay down first mortgages. In this thread, Don Spafford of Idaho is the only one who discusses the primary reason WHY promoters of this strategy believe it works so well. He says:

"The value of the velocity strategy comes from making the larger lump payments which jumps your payment schedule farther ahead and therefore each subsequent payment also is now paying more toward principal than interest. By only paying extra toward principal each month, you do not get the same effect. Yes, it will still pay it off sooner, but not as quickly and you would still pay more in interest over the life of the loan. By using this method properly, it would pay off the loan much sooner and save thousands in interest, even calculating for the heloc interest. But that is only if it is used properly. It is not simply taking out a loan to pay on another loan."

And that gets to the heart of the matter. To wit, if $10K is taken out of a HELOC and applied as a lump sum to the primary mortgage, several YEARS of interest payments may be skipped ("saved" or "never paid"), due to the fact that in the initial years of a 30 year loan, 90% to 95% (depending on interest rate of course and how far into the loan schedule you are) of the payments are interest, and very little is principle reduction. Everyone here should agree on this point, correct?

Don Spafford further explains that the $10K taken from the HELOC will be paid back in less than one year, IF all monthly income is placed into the HELOC, with monthly expenses taken from that same account. It can only be paid off in less than one year IF income exceeds expenses by at least $1K (10 months X $1K = $10K)

Although it is true that $10K in principle payments was in effect transferred from the HELOC to the primary mortgage, that is not a fundamental point of the analysis. What IS fundamental is that the amount of interest payments skipped on the primary mortgage due to the lump sum is huge, equal to MANY times the amount of principle paid down. Another fundamental point is considering how much total interest was paid to the HELOC over a period of one year while its balance was steadily reduced from $10K to zero...

In other words, what is the RATIO of interest amount skipped ("saved") to the interest amount paid (not saved) to the HELOC? Who on this thread can answer that simple question???

7 Reply

Don SpaffordPro Member

OP

Investor · Idaho Falls, ID · Member since 2016 · 935 posts · 629 votes

8y

@Gary Floring Thanks for reiterating the point I was trying to make. It has been said in different ways at the start of this thread. However, there is one point that maybe was not made clear. The way this is supposed to work is that you never draw down completely the LOC. The basics of it is that if you get a LOC for $10k. before you borrow anything from it, you first put your savings into it, thereby bringing the balance up to say $12k. Then you take out the $10k to put toward the principal, leaving a balance of $2k (only borrowing $8k from the $10k LOC) but you then treat it like a checking account. So you then take your income and put it in there, lets say $3k. So now it is up to $5k, and you are only paying interest on that day(s) for the now $5k you've borrowed. From there you then take out as needed to pay your monthly bills. And, as you said, you are in a position where you are saving $1k per month. So by the end of the month your balance is now $3k (you've now only borrowed $7k). So you do this each month which helps keep your average daily balance higher to not pay as much interest for the amount borrowed. You do this each month building it back up until repaid and build it back up a little more before doing it again so that you technically never borrow the full amount. So the beauty of it is that you are not only now paying less interest on the LOC amounts, but as you mentioned, it pushes you years ahead in your amortization schedule and each normal monthly payment is paying more toward principal than interest. But, I do agree with what others have mentioned that it may not be the best use of your money. If you prefer to save to buy more properties, then do that instead. I'm at a point myself where I prefer to do that at the moment to build up more cash flowing properties first. obviously the earlier in your payment schedule you start doing this the more effect it will have. So to answer your last question, I don't know if there is a good way to truly calculate the ratio of savings. It would all depend on a lot of factors such as your mortgage interest rate, your discipline in doing this consistently, when you start doing it, and your savings rate. I suppose you should throw in some opportunity cost factors as well such as using that income to buy other income producing properties.

Honestly I don't know why there is so much argument on the subject. it is proven to work by those who have done it. The math makes sense to support it. The only thing that gets in the way is our own brain telling us it doesn't make sense. There is nothing magic about it, just math and the way the amortization schedule works. For those that still don't understand, go back to the beginning of this thread. I included some links to websites that show the simplicity of it. I just hope that more people come to understand that it is another tool available to help put someone in a better position to be set for life with a paid off primary residence if nothing else, but maybe also at some point to get more income properties paid off as well to enjoy more cash flow with perhaps fewer properties, especially when you are ready to start "retiring" and not have as much to worry about with hundreds of properties.

5 Reply

Brian CardwellPro Member

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

8y

@Don Spafford well said. The process works.

1 Reply

Bill F.

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

8y

@Don Spafford First let me say, you can do whatever you want with your money and its no one's business but your own.

However; there is a good way to calculate the savings. It takes about 20 min in excel. See here. Page two about 2/3s the way down Chris May posted a dropbox link where he modeled it out.

Spoiler, you don't get the results you think, because for it to work would have to violate basics algebraic principles. Then there is the harder to quantify with basic math risk of having two debt payments instead of one.

If you can find a 0% HELOC, then this becomes an arbitrage situation, but anytime your HELOC is at or above your primary note's rate, this is a much riskier strategy that does not have much, if any, reward.

2 Reply

Brian CardwellPro Member

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

8y

It is still laughable to me for people to keep coming on here trying to disprove something that has been done and continues to be done successfully. It's a tool. If one wants to use it, then use it. Because it works, I guess basic algebraic principles are being violated. 😀

The spreadsheet you show is nice. First if you only have $300 left over at the end of the month. You own too much home or you, at the very least, need to reduce your debt. In your second table when you put the ~$300 extra payment on your mortgage, that money is gone. When you use the heloc the proper way you still have access to the $300 a month. So you are using OPM to pay down that mortgage.

*Pick up the mic* 😉

0 Reply

Bill F.

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

8y

@Brian Cardwell if by done successfully you mean paying off a primary mortgage in about 1/3 the time, then yes its being done successfully.

That does not mean you save money or have less risk. You can talk about how big the mortgage is and all that other stuff. It doesn't change the math.

If it comes down to believing a bunch of people on the internet who move the goal post anytime they are presented with a fact they can't refute and who use far too many emojis or a part of mathematics which is foundational to engineering, biology, economics, statistics, physics, ect, I'll stick with the numbers.

To each their own though...

2 Reply

Brian CardwellPro Member

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

8y

So to be clear, our goal was to pay off the mortgage early. The results were the mortgage got paid off early and we saved on all those extra interest payments that would have been paid over the term of the load. Yes I would call that successful.

You are correct the math shows if you pay more to principle, you will pay the mortgage off faster. It is just a matter of how one does it. Using a HELOC is in fact backed by the math. Could one use another method? You darn Skippy they could. For me, this was the best method I could have used. It's just another tool.

0 Reply

Bill F.

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

8y

@Brian Cardwell it is a one tool, but not the most efficient tool available. You don't save any interest payment, you defer them to the HELOC.

Look at this post, page seven. Starting at the first comment will give contex, but the real gem is Roy N's second post on that page where he compared the Velocity Banking to prepayment, bi-weekly payments and bi weekly prepayments.

Best of luck.

0 Reply

Brian CardwellPro Member

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

8y

So this is where we differ. Your understanding of the process is incorrect based on the spreadsheet. For that matter most people who read and comment on this process have an incomplete idea of how this works. When done properly one absolutely saves on the interest of the original loan. I have been down this road far to many times on these forums. I paid off my mortgage using this method and am in the process of paying off another. So I know it works. There may be better ways but this way works great for me.

Originally posted by @Bill F.:

@Brian Cardwell it is a one tool, but not the most efficient tool available. You don't save any interest payment, you defer them to the HELOC.

Look at this post, page seven. Starting at the first comment will give contex, but the real gem is Roy N's second post on that page where he compared the Velocity Banking to prepayment, bi-weekly payments and bi weekly prepayments.

Best of luck.

0 Reply

Gary Floring

Bremerton, WA · Member since 2018 · 49 posts · 35 votes

8y

Bill F., please explain your statement

"You don't save any interest payment, you defer them to the HELOC."

If several months or years are knocked off the primary mortgage, that would equate to tens of thousands of dollars. How is that amount "deferred" to the HELOC?

0 Reply

Gary Floring

Bremerton, WA · Member since 2018 · 49 posts · 35 votes

8y

Brian Carwell (above) says that he used this method to dramatically pay down his primary mortgage and avoided paying large amounts of interest.

David Dachtera of Illinois (earlier parts of this thread) said he also shaved approx. 20 years from his amortization schedule, and avoided paying over $130K in interest. Is this mathematically POSSIBLE using $15K chucks from a HELOC and applying them once per year to the primary mortgage???? According to David,

"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."

So his original amortization schedule indicated $187K in interest would be paid over 30 years, but instead, he ended up paying only $52K. Where is he wrong on this calculation???

3 Reply

Brian CardwellPro Member

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

8y

The funny part is no one is saying one doesn't have to pay down the principle to payoff the mortgage early. I think everyone agrees on that point. What those of us who have done this are saying is you don't have to use your own money to pay the lump sum up front. One can use the banks money. We get it, that you don't like this strategy as described by "velocity banking" , but this strategy absolutely works as described by "Velocity banking".

1 Reply

Bill F.

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

8y

@Gary Floring does the HELOC charge interest?

0 Reply

Gary Floring

Bremerton, WA · Member since 2018 · 49 posts · 35 votes

8y

Originally posted by @Bill F.:

@Gary Floring does the HELOC charge interest?

Yes. However, it is not "deferred" from the primary mortgage.

1 Reply

Josh Woody

Member since 2018 · 1 post · 2 votes

8y

First off the word is principal. It is surprising to me that I'm on a real estate investing forum and I see it spelled "principle."

If you have 2K surplus each month, just pay that each month and pay your principal balance down. Works the same way as making a lump sum of 12K and taking 6 months to pay off a LOC. If you are concerned with accessing the 2K, just take a HELOC out and leave it at a 0 balance and use as an emergency fund. You are continually building equity with your 2K/mo payments so your HELOC can increase. Eventually use your HELOC as a war chest to take advantage of deals.

Velocity banking only works because principal is paid down. Don't need to pay 2K for a fancy calculator.

2 Reply

William Wong

Investor · Sacramento, CA · Member since 2015 · 4 posts · 3 votes

8y

@Josh Woody I completely agree. After reading about this strategy, watching a couple hours of video, attending a seminar, and running the numbers myself in various calculators, I've realized it is just taking advantage of making extra payments. Opening a LOC as an emergency fund, keeping it at 0, and just making extra payments towards your principal (equivalent to what would have gone to pay the LOC) would essentially achieve the same result. However, if using this strategy is helping others then its a win win. I just don't agree how some people advertise it as a "revolutionary" strategy and take advantage of average people who may not have the time to fully understand it. It should be advertised as just another option of making additional principal payments.

2 Reply

Daniel Mina

Plano, TX · Member since 2017 · 20 posts · 5 votes

8y

My understanding is this method is probably more beneficial for paying off student loans especially if you have multiple accounts. You could even argue going after the smaller interest/principal accounts just to increase your cashflow position every time an account is paid. You'd probably save more money by paying towards the higher interest loans, but by using the LOC to pay in chunks that you could pay off in a few months, you could seriously speed up your cashflow positions. Kind of like Dave Ramsey's snowballing, but in an accelerated fashion.

If using this method for multiple amortized loans, this method works to save you money in the following ways (despite interest on a HELOC or any LOC):

1) By paying in chunks and paying off an account, you gain that cash flow that was used to make monthly payments. You gain it back quicker than regular monthly payments (towards the principal as well) from your monthly cashflow.

2) By paying in chunks, you move down the amortization schedule towards higher principal payments.

I could see paying off a mortgage this way as well, but you just have to be aware of where you are in the amortization schedule, and how much you save by moving down the amortization schedule as opposed to the interest you'd pay on the balance you transfer to the LOC.

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Scott A Smith

Jeffersontown, KY · Member since 2017 · 11 posts · 3 votes

8y

Originally posted by @Michael Lucero:

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.

Bingo. I basically came here to say the same thing and you said it already and better than I would have. I've been in the banking industry for 17 years and people looked at me weird when I looked at them weird for suggesting that this was some fancy new way to game the system. It's really not. Opportunity cost is huge and the ability to use equity and maintain leverage for reduced litigation risk is worth more than paying the mortgage down quicker.

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Juan A. Padilla

Flipper · Round Rock, TX · Member since 2017 · 9 posts · 0 votes

8y

Such great information on this thread for sure, now to the questions..

1. If I am looking to achieve getting out of complete debt in 5 to 7 years (car, credit cards and house), would it be best to go with a HELOC or Personal LOC?

2. Would it make sense to include my 0% credit cards and have them be paid off by the HELOC or Personal LOC (which for sure would be higher than 0%). I don't know how the math makes sense?

3. Would it make sense to include my car loans (both of them less than 4.5% interest)?

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Deborah Louise

Member since 2018 · 2 posts · 0 votes

8y

@David Dachtera

Hi

I'm new to this and a bit confused. I'd really appreciate your help. I looked at your excel spreadsheets, and it seems like between the HELOC and mortgage, you're paying $2375.003 a month. So I used that monthly payment to work out how much interest I'd pay on a $200k mortgage at 5% using that monthly repayment, but with no HELOC involved. On your spreadsheets if I add the total interest of the mortgage and HELOC it totals $52,690.09. But without the HELOC, paying back the mortgage at $2373.003 a month only results in $46,829.07. So using the HELOC costs you $5,861.02 more. Did I do something wrong? Or am I missing something? Thanks heaps in advance! Deb.

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Has anyone ever used the Velocity Banking Strategy?

Has anyone ever used the Velocity Banking Strategy?

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