Investor · Idaho Falls, ID · Member since 2016 · 935 posts · 629 votes
I searched for Velocity Banking but did not get anything to return except for some lenders using that name. I just was introduced to this strategy this week and was curious if anyone has done it and what their experience with it was.
If yuo don't know, the basic concept is to use a line of credit from the bank and use it like a checking account so you put yout income into it but get a LOC for like $10k, add in your income for that month, and use the $10k to pay the principal, and then pay your other expenses from that account and as long as you are spending less than what is going in, you build that LOC back up again so you are able to pay back the $10k LOC and then use it again to pay toward the principal. So if you save $1k each month, then every 10 months you can use it again or get an increased LOC and use a larger amount. Doing this strategy gets a 30 yr loan paid off in about 7 years and saved tons of interest. The LOC calculates interest on an average daily balance, so as you have money going into it each month, you are creating less of an amount to charge interest for. So over the course of a year, for that $10k LOC, assuming $4k income and $3k expenses, for a $250k mortgage at 5.25%, you pay about $13k in interest on the mortgage payments (first year of mortgage) vs only a few hundred dollars on the LOC.
The only down-side I can see is opportunity cost. That money that you are saving each month could be deployed to purchase other properties rather than helping to pay off any specific loan. But if you have enough other sources of income and strictly use the rental income for any given property to put back into its own LOC, then theoretically, you can have full 100% cash flowing properties in 7-8 years, depending on how much you are saving each month. You could even use it for your primary residence.
I just bought my first 4 plex this week, literally closed the same day I was shown this strategy, and it blew my mind. I want to use it with this property since it will be cash flowing about $700/mo and if I can get it paid off much sooner and save a lot of money in interest, that would be awesome.
Rental Property Investor · Pasadena, CA · Member since 2016 · 164 posts · 149 votes
9y
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.
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.
No, nothing "Wrong", just another way to achieve the same goal with different side effects.
Here's what you need to remember about installment / amortized loans versus revolving credit lines:
You can pay down the balance of an installment / amortized loan, but then that money is "gone" - you cannot access your equity without refinancing or taking out a HELOC.
When you pay down the balance of a revolving line such as a HELOC, that equity is easily accessible should an emergency arise.
Paying down the balance of an installment / amortized loan does not improve your credit profile appreciably.
Paying and then re-using the available balance of a revolving line / HELOC helps support your credit profile / score.
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)?
The answer is: it depends.
What are you trying to achieve?
HELOC Vs. Personal LOC: A HELOC should not count against your revolving credit utilization. A Personal LOC probably will.
Your 0% cards are a whole different strategy. Ideally, you'll want to take that money out for as long as possible, then pay it all back before the interest kicks in. The lender will then likely offer you a new 0% term ... lather, rinse, repeat.
Your car loans? Again, it depends. Yes, they're "depreciating assets", but do you really want to use your equity to pay for them? ... then pay down the equity line?
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.
It's not financial advice at all, in any way shape or form.
It's simply a way to achieve certain financial goals. It's not a be-all or an end-all and no, one size NEVER fits all.
If it works for you, use it. If it doesn't, don't.
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)?
The answer is: it depends.
What are you trying to achieve?
HELOC Vs. Personal LOC: A HELOC should not count against your revolving credit utilization. A Personal LOC probably will.
Your 0% cards are a whole different strategy. Ideally, you'll want to take that money out for as long as possible, then pay it all back before the interest kicks in. The lender will then likely offer you a new 0% term ... lather, rinse, repeat.
Your car loans? Again, it depends. Yes, they're "depreciating assets", but do you really want to use your equity to pay for them? ... then pay down the equity line?
These are decisions I cannot make for you.
That helps enormously. Thank you so much for taking the time to reply. Much appreciated.
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.
....
And at the end of each month, your total owed, 1st mortgage plus HELOC, totals exactly what it would total if you simply paid an extra $2000 on principal of the 1st mortgage, without taking out the HELOC.
Assuming the spreadsheet that @DavidDachtara posted is a correct representation of "velocity banking," the strategy does work, in that it can pay your mortgage down faster. However, it does not pay the mortgage down with a lower interest expense than simply making monthly extra payments on principal equivalent to the HELOC payments would. It pays it faster than monthly extra payments on principal, but at a greater interest cost.
To use the typical advertised example of 7 years, I calculated the default loan in David's spreadsheet, $200,000 at 5% on a 30-year loan, and the default HELOC rate in David's spreadsheet, 7.5%. With those numbers, and with the goal of paying the mortgage down in exactly 7 years, the HELOC payment on principal would be $22,000 a year, repaid at $1908.66/month (except the last payment, somewhat less). The interest on the 1st plus the interest on the HELOC over the 7 years totals $46,486.
The alternate payment, $22,000 divided by 12, is $1833.33 (but a smaller last extra principal payment). Paying this extra on principal monthly pays off the mortgage in 7 years and 8 months with a total interest cost of $44,921.
The HELOC method ends up costing $1565 more in total interest. And I didn't even include the other costs of the HELOC: Closing costs and annual account maintenance fees. Based on a HELOC I know of, that can total, for 7 years, about $700. That would bring the excess cost of using the HELOC rather than making an equivalent monthly extra payment on principal to $2533.
Maybe the numbers work out differently if you do the method of a massive payment on the 1st from the HELOC every six or so months, with monthly payment of your entire paycheck on the HELOC, and payment all your living expenses from the HELOC, and rinse and repeat; perhaps there's some difference in the amortization of a few dollars. But I can't see it actually making up for the extra interest (and fees) you pay on the HELOC, which you don't have to pay if you simply make the extra payment on principal from your paycheck.
As for the statement that what you pay from your paycheck is gone, and the HELOC instead makes money available for emergencies or investing as you recycle paying it off every so many months, well, there's a simple remedy for that: Take out the HELOC and just do not use it except for those emergencies or investments. That way, if it's unused, you don't have the interest cost, at least.
But assuming David's spreadsheet is doing the numbers right for velocity banking, it does not cost less than simply making equivalent extra payments on principal, though it can pay off a mortgage in fewer months.
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
You know, the goal is to pay off your mortgage early. There is no magic to this way of doing it. There are also other ways to accomplish the goal of paying off ones mortgage early. I used this method years ago to pay off my mortgage and it works without the feeling of paying more out my pocket.
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
8y
I think everyone considering this should listen to episode 6 on the Get Rich Education podcast, which talks about why financially free beats debt free.
Great discussion. I am trying this for my new mortgage on my primary residence. I want to make 1 full payment. Then 3 days later pay the principal only of my next payment with a memo stating this is the principal of my 2nd or next payment. I understand a bank can't charge interest if I do this. My question and maybe problem is that I have to pay through an escrow account. Will this work with using an escrow account? And secondly my mortgage statement has wording on it that if a partial payment is made, it will not be applied to the loan until the full payment is satisfied. Any advice is greatly appreciated. Thank you.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
8y
@Jason Ski Most lenders allow you to make a principal only payment. And it will reduce your principal balance and accelerate your mortgage. But it will not do anything in terms of monthly payment - the next due date a full payment is still required. Is not like you can pay the principal at beginning of the month and the interest at the end - that is a partial payment, and like you said, it will not be applied to the loan until the full payment is satisfied. More than that, you have to be careful as there are lenders that allow bi-weekly payments, but they also keep the payment till the end of the month when a full payment is applied (in other words, you just give them money for free for that month, instead of making one extra payment a year). You are better off to just pay extra principal when you have the funds.
I just stumbled on this thread, read a couple pages then skipped to the end. Has anyone brought up the idea of refinancing a 30 year mortgage every 1/3 of the term. Example: original loan amount 150k. When it's paid to 100k refinance for another 30 years. At 50k refi again. reducing the monthly bill. Continuing to pay the same amount as the original loan, only using the extra amount on the principle? You would need to pay extra on principle to make a dent, and its like a train, hard to get moving but, you know.
I haven't ran any numbers, but the refi to get a lower payment has helped me tremendously in the past. It seems to make sense to me to chunk it to get the principle down as quickly as possible then refi for another 30.
Am I way off base? Is there a name for this strategy?
I just stumbled on this thread, read a couple pages then skipped to the end. Has anyone brought up the idea of refinancing a 30 year mortgage every 1/3 of the term. Example: original loan amount 150k. When it's paid to 100k refinance for another 30 years. At 50k refi again. reducing the monthly bill. Continuing to pay the same amount as the original loan, only using the extra amount on the principle? You would need to pay extra on principle to make a dent, and its like a train, hard to get moving but, you know.
I haven't ran any numbers, but the refi to get a lower payment has helped me tremendously in the past. It seems to make sense to me to chunk it to get the principle down as quickly as possible then refi for another 30.
Am I way off base? Is there a name for this strategy?
Perhaps I'm misunderstanding what you're suggesting but doing this would only pay off a loan faster if you were reducing your rate or term at each refinance. Anytime you refinance, the majority of the first several years are almost all interest payments and very little principal.
For example, on a $150k 30 year mortgage @ 4.75%, the monthly payment is $782.47 ($593.75 interest, $188.72 principal). You used the words refinancing "every 1/3 term". Based upon your subsequent sentences, you quoted "$100k" as the refi amount so I assume that by "term" you really meant "paid down 1/3 of the original principal" - although the following concept doesn't change regardless of the interpretation. This wouldn't occur in our example until your 182nd payment (i.e. over 15 years into the mortgage). If we then refinanced $100k for 30 years @ 4.75%, our new monthly payment would be $521.65 ($395.83 interest, $125.83 principal). If you still paid the original monthly payment of $782.47 (i.e. made an extra principal payment of $260.82 each month), you would pay off the loan with your 179th payment on the new loan. This would be the exact same thing as if you never refinanced at all. All you did was cost yourself additional fees for the refinance with literally no gain whatsoever. This isn't a "strategy". It only works if your rate goes down when you refinance. If the rate at refi went down to 4% and you kept paying the original amount, you'd be able to apply $305.05 per month towards principal, paying off the new loan in 167 months (effectively shaving off 11 months from the original loan).
As an aside, velocity banking sounds utterly pointless to me. No real gain and simply allows people who are already financially vulnerable to overspend and dig themselves deeper into a hole. If any financial "expert" tells you to do this, run. If you can still hear them, you're not running fast enough.
Well either way YOU spin it . I paid off my $252k mortgage in less than 7 years
Just want to make it clear that I used this method. I may not be able to express the intimate details and explain why this works but it does.
Quotes like this reinforce my opinion that velocity banking isn't a strategy, it's a cult. "I can't explain it to you using math but, trust me, it works! It's magic!"
Well either way YOU spin it . I paid off my $252k mortgage in less than 7 years
Just want to make it clear that I used this method. I may not be able to express the intimate details and explain why this works but it does.
Quotes like this reinforce my opinion that velocity banking isn't a strategy, it's a cult. "I can't explain it to you using math but, trust me, it works! It's magic!"
They do understand it, AND they can back up their understanding with the relevant arithmetic. There is no mystery here. You don't have to have first-hand experience using the HELOC "method" to know when your mortgage will be paid off - it is simple math. You can run the numbers for various interest rates and additional payment amounts toward principle and see exactly when the mortgage will be paid in full.
The people responding to you are saying that using a HELOC is unnecessary. It is the extra payments toward principle that pay down your mortgage faster, regardless of the method you use. Far too many people continue to parrot a myth that a mortgage is some type of debt trap, and that a HELOC somehow frees you from this debt trap. That is FALSE. If you start throwing a whole lot more money toward paying down your mortgage you will pay it off sooner, HELOC or no HELOC.
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
Haha You didn't read the entire post, Jeremy Z
I am aware of the math. I have issues with those who cry cult, scam or anything else to something they don't know about or don't like. There is more than one way to achieve ones goals. I eliminate my mortgage doing it the way I have described here on the forums .I have never said it was the only or best way.
Tacoma, WA · Member since 2018 · 230 posts · 257 votes
8y
I've read this thread too many times, Brian C. And you keep saying things like, "One has to love when those who don't understand something, bash it." I'm just clarifying that the people you are referring to have a better understanding of it then you do. And they don't bash the method, they bash people who spread misinformation about the method (like those who claim the ones who readily understand the math somehow don't understand it).
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
You are absolutely correct Jeremy Z . I call it like i see it. Why bash something you either don't understand or don't agree with. One has to admit when this is done properly it will assist in paying off ones loan early. There is no denying that. There is no magic to it . It is just math. There is no misinformation here my friend.
@Brian Cardwell yes it does work, but it does not work for the reasons and the way people promoting say. As @Jeremy Z. says many people spread misinformation about this and most can't really explain where the savings are coming from. When they try, they just spread more mis-information.
A typical example used is someone earns $1500 more than they need to live off of. That money is funneled through smoke and mirrors and is used to pay down the mortgage. Well no S*** Sherlock. Anyone that has an extra $1500 a month to apply towards principal will be able to pay their principal down substantially faster and save significant interest.
I have run into only one person that could rationally explain why the gyrations of the HELOC help. (sorry to those here that know, but I didn't read your posts) The vast majority of the savings and speed that the mortgage is paid off is because of the substantial additional income applied to the mortgage. It is Not due to the HELOC or timing. While those do help, the amount is not that significant.
@Brian Cardwell yes it does work, but it does not work for the reasons and the way people promoting say. As @Jeremy Z. says many people spread misinformation about this and most can't really explain where the savings are coming from. When they try, they just spread more mis-information.
A typical example used is someone earns $2500 more than they need to live off of. That money is funneled through smoke and mirrors and is used to pay down the mortgage. Well not S*** Sherlock. Anyone that has an extra $2500 a month to apply towards principal will be able to pay their principal down substantially faster and save significant interest.
I have run into only one person that could rationally explain why the gyrations of the HELOC help. (sorry to those here that know, but I didn't read your posts) The vast majority of the savings and speed that the mortgage is paid off is because of the substantial additional income applied to the mortgage. It is Not due to the HELOC or timing. While those do help, the amount is not that significant.
to me Velocity banking = snowballing.. just pay more a month.. pretty simple math as I am a simple minded guy..
I always when I have had mortgages will either round up to the nearest thousand.. say my mortgage payment is 1200.. I will set up auto pay at 2000... as my number one goal is equity.. I don't need cash flow.. as I am in the business and I create cash flow.. now I can see for others that are not in the business and wish to live the landlord retirement dream that they will pay minimum payments don't care about equity and simply want cash flow to eat.. drink and be merry..
I did not live in the great depression but my parents did and grand parents. and boy my Grandfather would not pay interest.. so some mid eastern cultures were interest is a sin.. I get that for sure..
so to me I still have to earn the money one way or the other .. so to minimize interest expense is my goal number one.. ( on long term held assets or my primary secondary or tertiary personal homes that I use.. and no debt is best for me.
now for most it does not matter.. but for us that are developers net worth actual true net worth and not a lot of long term liabilities is important component of getting loans. now granted you have income to off set.. but the lender will usually discount that income and valuations to the point that it does not do you any good it can harm you when your looking for Development loans which are about as tough as they come to get.. Any way... pay off your loans quickly save interest is my velocity
Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
8y
Being a math major, and the frequency that this topic seems to pop up, I thought I would dig into it a little bit because there are still usually shreds of truth hidden amongst the false information.
TLDR: A heloc, under the right circumstances, CAN speed up the loan payoff for some people, however done correctly it will likely only shave off roughly 3-4 years off of a 30yr note. It is not some magic formula to cut decades off your mortgage unless you make significant overpayments, (in which case you wouldn't need the heloc in the first place).
The basic premise of "chunking" large amounts onto their heloc which people seem to promote is false. It does no good to trade 50k worth of mortgage debt at 4% to a 50k heloc at 6% that keeps revolving from month to month and takes a year to pay down that heloc before doing the process again. Simple math says that 6% > 4%. However, if instead of taking large chunks, if you take smaller chunks (equal to your paycheck) the process can work.
As an example, lets assume that a married couple has a total income of 10k/month, and keeps 2k in the bank for emergency funds. Lets also assume this couple gets paid once per month on the first of the month. Typically this would mean their bank account spikes up to 12k on payday, and then slowly starts to trickle back down to 2k as the month progresses and they pay their bills.
Instead, what they could do is set up their bills such that all of their bills except the mortgage, are due as late in the month as possible. We will assume the mortgage is due on the first, and all other bills, (credit card, utilities, cable tv ect) are all due on the 20th. Now they will open up a heloc with at least 10k available limit, and during that first month pay the full 12k that they have in the bank towards the mortgage. At this point they have an empty heloc, no money in the bank, but 12k paid towards the note. On day 20 when all of the bills are due, they will pay the all of their bills by tapping into their heloc. This will max out their heloc at 10k, which stays maxed for roughly 10 days until they get paid on the first of the next month. This paycheck goes to paying off the heloc in its ENTIRETY, any additional amount owed on your heloc that revolves into the next month is a bad thing. Now we are back to the original situation, where the couple has no money in the bank, and an empty heloc. Rinse and repeat this process for the next 26 years or so and the mortgage will be paid off, and then replace the original 2k that the couple had in the bank.
This process does not involve making large 'over payments'. The only extra amount that you pay would be the 75-100 dollars a year or whatever amount your bank charges for its annual fee for the heloc. This translates into about 7 bucks per month, which even if you didn't have a heloc, and instead paid that 7 dollars over your mortgage per month, it would only shave off somewhere in the neighborhood of 6 months of your typical priced mortgage. Where as the heloc method would likely save 3-4 years.
The reason this process CAN work under some circumstances, is two fold. First, the couple had 12k in the bank right after payday (2k emergency funds and 10k paycheck) which is wasted money that is neither earning interest, nor saving interest. Using the heloc method, this money is immediately put to use to pay down the loan, and using the heloc at the end of the month to pay bills. The other reason is that while the heloc rates are higher than the normal mortgage, the amount of time that the heloc is being utilized is less. Keep in mind that in this scenario, there is only 10 days out of the month that interest is being accrued by the heloc. So instead of the 10k being on your mortgage for the entire month at 4%, you are moving it to your heloc for 10 days at 6%, (which prorates into an effective 2% over the course of a full month). This means that the heloc is paying less overall interest even though it has a higher interest rate. These two reasons (while small reasons) slowly start to chip away at the mortgage and speed up the process ever so slightly. This process would save a few years off of a typical ~200k loan.
Obviously this entire method is dependent on the exact terms of your origianl loan, your heloc rates, how far back into the month you can push all of your bills etc. Is it worth going through the hassle of setting all of this up to wipe out 3-4 years of mortgage, or the possibility of a heloc being frozen? That is up to you.
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
@Ben Zimmerman though I love the way you have explained this process, the results you have come up with are far from the actual results I was able to achieve. I was able to pay off a little over 230k in just over 7 years using this "velocity" banking. So if you use this correctly, one can most certainly save 20 plus years on a 30 year mortgage.
After reading through this thread I'm amazed at how many real estate "experts" and math majors cannot understand the benefits of velocity banking. Are you going to allow your pride to win over 10's of thousands of dollars in interest savings? They mock the idea and say it is not real, yet the few who understand the principal continue to benefit from it. Take the time to understand how this works. Ask the people of Australia if velocity banking works. It is common practice there and half of all Australian's homes are paid off because of this, while in America we are convinced to do things a different way and end up paying 2 to 3 times the amount we borrowed for our homes over 30 years. Or even worse, because we refinance every 5 years and start the process over again and again.
