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?

David Stewart

Real Estate Agent · Ocala, FL · Member since 2015 · 29 posts · 14 votes

8y

Originally posted by @Chris Coles:

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.

It’s not a matter of not understanding the benefits. I did the math. I’ve now used two velocity banking advocates’ own spreadsheets to compare velocity banking as a method of paying off a mortgage early versus simply adding the equivalent extra payments on principal. (That is how velocity banking pays the mortgage down: it pays principal off early.) The results I got with both were: velocity banking pays off the mortgage marginally faster—three or four months faster—but at a higher interest cost (plus fees), than simple, direct extra monthly or periodic payments on principal.

It works. It just doesn’t work at a lower cost than a far easier method, and it doesn’t free up any more money either. It works at a higher cost than simply adding an equivalent extra principal payment on your monthly payment, or making twice- or once-yearly lump payments on principal.

3 Reply

Renee Bridwell

Investor · Meridian, ID · Member since 2017 · 14 posts · 18 votes

8y

I have had quite a few people reach out to me about Velocity Banking from this post, so I have decided to offer a free, live Zoom presentation TOMORROW (Saturday 09/22/18) @ 8:00 p.m. Mountain time to demonstrate how it can work for pretty much everyone. Message me with your name & email, & I will send you the login!

1 Reply

Linh Ngo

Member since 2018 · 1 post · 1 vote

8y

@Ben Zimmerman

Your understanding is correct.

However, you're missing the extra payments, as said by "people have done this" (I'm not one of them and just explaining my understanding). this couple should be positive cash flow each month, after all bills (including mortgage payments). in other words, for your example, they make $10k a month but their total bills only amount to $9k. This extra $1k (first kept in HELOC to accumulate ) then applied to reduce the principal is what really shortens the amortization table. Obviously one can pay directly that same $1k to principal with VIRTUALLY same effect. I emphasize virtually because I don't think the difference is very large (in respect to hundreds of thousands being saved) between accumulating then pay a bigger lump sum vs periodic extra payments. And here's where people have to decide if their priority is to throw everything they have into paying down mortgage (and save on interest) or invest elsewhere to take advantage of leverage and making a better spread than a measly 3%-5% mortgage.

The 2 following points are to lower the HELOC interests:

the $2k in their bank account could actually be left in the HELOC so that it doesn't sit in their bank account "not earning nor saving interest".

timing all bill payments, as you said, definitely helps (albeit w/ lots of work) but so does depositing all paycheck directly into HELOC, then slowly pay off bills. because the first few days of the month you barely pay any interest on the small bills, then the interest gets a little higher as more bills are paid, until the last few days of the month when the full interest amount is charged.

Again, this is purely my understanding of the method, explaining in my own words, not advocating nor bashing.

1 Reply

David Oldenburg

Lender · Granite Bay, CA · Member since 2014 · 456 posts · 454 votes

7y

This is not a brilliant idea for anyone thinking about it. Paying off a mortgage quickly, is just simply paying more money...period. Paying a mortgage with a HELOC is dumb, as you are paying interest on the HELOC in order to pay interest on your mortgage. BTW, most HELOC's come with a rate higher than your mortgage rate. Would you use your credit card to pay your mortgage payment? Of course not, because it comes with a rate higher than your mortgage, the same goes for a HELOC.

If you want to rapidly accelerate your mortgage, simply pay as much as you can each month toward your mortgage. When you pay off debt, apply that payment to your mortgage as well. Don't eat out as much and apply that money. You will be accelerating your mortgage each month, and each month more and more of your payment will be going to principal. That's how amortization works on a 30-year loan.

2 Reply

James Miller

Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes

7y

I you have an extra $1,000 a month, why not just make an extra $1,000 payment a month to principal on the primary loan, and not pay interest on the LOC? Are you saying paying $10,000 extra principal on day one outweighs the interest you pay at only paying down $1,000 a month on the primary? What are HELOC rates lately? I also haven't looked into HELOCs since TCJA was passed; I'm assuming they can't be written off anymore than they could before TCJA, likely less.

0 Reply

Jason Primrose

Member since 2018 · 1 post · 0 votes

7y

James Miller

Here is a calc with 1k per month.

It works, here is a calc, Yes you might pay more interest, yes you could just pay more on your home. But and this is a big but, who ever really invest every last dollar they have. You are using any extra dollar you have and putting it at your principal that would otherwise sit? This forces someone to consider a budget and force invest into paying off the debt. I know I personally wait till I have 5k extra in a savings account and then move it over to other accounts like Roth, investments, school loans etc.

Paying off a home in 4.67 years VS 11.67.

I don't see the big deal in paying 12,151 more interest to kill a loan like that.

Play with the calc yourself.

https://www.nreigrp.com/vb-calc-2347482457.htm

What if we invest 12k for 15 years rather than extra payment?

What if we pay off in 4 then invest?

What if we say screw the house and borrow from the heloc every few months to invest?

0 Reply

Arnel Nacino

Member since 2018 · 2 posts · 0 votes

7y

@Jason Primrose. Thanks for posting your link to the VB calculator. What does the “VB Account Rate” refer to? How do I determine what percentage to put in there for my own scenario?

Thanks in advance.

0 Reply

Arnel Nacino

Member since 2018 · 2 posts · 0 votes

7y

Oh, never mind. I just watched the video again, this time to the very end.

0 Reply

Brandon H.

Rental Property Investor · San Francisco, CA · Member since 2016 · 52 posts · 48 votes

7y

Originally posted by @Jason Primrose:

James Miller

Here is a calc with 1k per month.

It works, here is a calc, Yes you might pay more interest, yes you could just pay more on your home. But and this is a big but, who ever really invest every last dollar they have. You are using any extra dollar you have and putting it at your principal that would otherwise sit? This forces someone to consider a budget and force invest into paying off the debt. I know I personally wait till I have 5k extra in a savings account and then move it over to other accounts like Roth, investments, school loans etc.

Paying off a home in 4.67 years VS 11.67.

I don't see the big deal in paying 12,151 more interest to kill a loan like that.

Play with the calc yourself.

https://www.nreigrp.com/vb-calc-2347482457.htm

Alright, I'm getting tired of playing velocity banking policeman. This thread really needs to die off. What Jason Primrose is highlighting isn't even an apples to apples comparison. He's comparing paying $1k more per month to a mortgage versus applying $5k via velocity banking. It's a scam, people. The calculator link he provided is even trying to sell you "Essentials Education" and pretends like it's an investment.

If any of you want to wear tin foil hats and drink Kool-Aid, that's fine with me, but please stop masquerading a cult as some mathematical magic. It's not - anyone who tells you otherwise is either lying or hasn't figured out how math works.

3 Reply

Brian CardwellPro Member

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

7y

@Brandon Hausauer you are correct. There is no magic. It is simple math. So when one shows the math, you still say scam. The math works. The plan works. If you don't like Kool aid, then dont drink it. But don't keep saying Kool aid isn't sugar water when it is. The method works just as whatever method you used to pay off your mortgage worked. Does one need all the other things people are trying to sell with the method? No but that doesn't mean the method doesn't work. If you don't understand it, you don't understand it. Don't call it scam because you don't agree with or understand the method.

0 Reply

Jeremy Z.

Tacoma, WA · Member since 2018 · 230 posts · 257 votes

7y

@Brian Cardwell

What rubs me the wrong way about how you and others pitch this method is the lack of transparency. You say you used this method to pay down your mortgage in 7 years, but you omit the fact that it was the thousands of extra dollars you put toward principle that really did it.

You're selling a jalopy and telling people it's the fastest car around, just because you drove it faster than most other drivers. You're neglecting to tell your customers that the other cars can be driven just as fast. At least that's my hunch!

1 Reply

R. Marcella Poole

Rental Property Investor · Oak Hills, CA · Member since 2018 · 16 posts · 3 votes

7y

This thread is invaluable; thank you all for sharing the tools, insight and feedback on this topic.

0 Reply

Brian CardwellPro Member

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

7y

Originally posted by @Jeremy Z.:

@Brian Cardwell

What rubs me the wrong way about how you and others pitch this method is the lack of transparency. You say you used this method to pay down your mortgage in 7 years, but you omit the fact that it was the thousands of extra dollars you put toward principle that really did it.

You're selling a jalopy and telling people it's the fastest car around, just because you drove it faster than most other drivers. You're neglecting to tell your customers that the other cars can be driven just as fast. At least that's my hunch!

Actually @Jeremy Z. I have been nothing but transparent. I outlined exactly how I did it either in this thread or another one. I absolutely have said that one has to have more money coming in then they have going out. So there is nothing I am hiding. Like I have said before I have nothing to gain by sharing except for the satisfaction of me giving someone a tool to pay off their mortgage early. On page 2,3, and 4 you will find that I clearly explain the extra money goes to pay down the HELOC. And that the money from the HELOC goes to pay down the principle of the mortgage. So please if you have a problem with how I explain it, would please be accurate with the criticism.

I fail to see how I wasn't clear about where the extra money was going and what was paying down the mortgage? Please let me know so I could be clearer the next time I explain it.

2 Reply

James Miller

Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes

7y

Originally posted by @Jason Primrose:

James Miller

Here is a calc with 1k per month.

It works, here is a calc, Yes you might pay more interest, yes you could just pay more on your home. But and this is a big but, who ever really invest every last dollar they have. You are using any extra dollar you have and putting it at your principal that would otherwise sit? This forces someone to consider a budget and force invest into paying off the debt. I know I personally wait till I have 5k extra in a savings account and then move it over to other accounts like Roth, investments, school loans etc.

Paying off a home in 4.67 years VS 11.67.

I don't see the big deal in paying 12,151 more interest to kill a loan like that.

Play with the calc yourself.

https://www.nreigrp.com/vb-calc-2347482457.htm

What if we invest 12k for 15 years rather than extra payment?

What if we pay off in 4 then invest?

What if we say screw the house and borrow from the heloc every few months to invest?

What's the math behind it? It looks pretty; but, anyone could photoshop fancy numbers to make it look like it saves money. I'm just not understanding the point of borrowing on the HELOC unless the HELOC's interest rate is less than the primary mortgage.

1 Reply

James Miller

Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes

7y

Originally posted by @Brian Cardwell:

Originally posted by @Jeremy Z.:

@Brian Cardwell

What rubs me the wrong way about how you and others pitch this method is the lack of transparency. You say you used this method to pay down your mortgage in 7 years, but you omit the fact that it was the thousands of extra dollars you put toward principle that really did it.

You're selling a jalopy and telling people it's the fastest car around, just because you drove it faster than most other drivers. You're neglecting to tell your customers that the other cars can be driven just as fast. At least that's my hunch!

Actually @Jeremy Z. I have been nothing but transparent. I outlined exactly how I did it either in this thread or another one. I absolutely have said that one has to have more money coming in then they have going out. So there is nothing I am hiding. Like I have said before I have nothing to gain by sharing except for the satisfaction of me giving someone a tool to pay off their mortgage early. On page 2,3, and 4 you will find that I clearly explain the extra money goes to pay down the HELOC. And that the money from the HELOC goes to pay down the principle of the mortgage. So please if you have a problem with how I explain it, would please be accurate with the criticism.

I fail to see how I wasn't clear about where the extra money was going and what was paying down the mortgage? Please let me know so I could be clearer the next time I explain it.

So why the HELOC in the first place? Just take the extra money that you would be paying at the HELOC and pay it towards the primary mortgage? I would understand that if the HELOC interest rate is less than the primary mortgage. But at least the last time I looked at them, they're not...

1 Reply

James Miller

Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes

7y

Originally posted by @Brian Cardwell:

@Brandon Hausauer you are correct. There is no magic. It is simple math. So when one shows the math, you still say scam. The math works. The plan works. If you don't like Kool aid, then dont drink it. But don't keep saying Kool aid isn't sugar water when it is. The method works just as whatever method you used to pay off your mortgage worked. Does one need all the other things people are trying to sell with the method? No but that doesn't mean the method doesn't work. If you don't understand it, you don't understand it. Don't call it scam because you don't agree with or understand the method.

Please show me the math then. If the HELOC's interest rate is higher than the primary, you're spending more in interest on the HELOC than you're saving on the primary... If the HELOC's rate is lower than the primary, maybe, this makes sense.

Here, show me how a HELOC saves me money here.

$100k primary mortgage, 20 years am, 4.7% fixed, no early prepayment penalty.

I can borrow $15,000 in a HELOC at 5.9% that floats quarterly.

Show me with math how borrowing at a higher interest rate, then putting those proceeds against my mortgage, then paying back the HELOC, saves me money over paying the equivalent additional principal on my mortgage instead of the HELOC.

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Justin Bauer

Investor · Cannon Falls, MN · Member since 2016 · 149 posts · 55 votes

7y

There is no magic.Do not pay off those great low interest rate loans!Its just doing what banks do making money work all of time,How many of you have escrow's for taxes and insurance just sitting in someone elses bank do nothing and paying high interest to the same bank for something else.

Its the first step in becoming your own banker.

infinitebanking.org

1 Reply

Brian CardwellPro Member

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

7y

With all due respect Mr. Miller, no photoshop involved here. The answers to your questions are provided earier in this thread.

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Ben Zimmerman

Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes

7y

I believe I already explained it, many people on this thread seem to (incorrectly) advocate doing large chunks on your heloc of lets say 30k, and carry forward balances on their heloc from month to month taking a year to slowly pay down that heloc until they are able to repeat the process, in which case you are absolutely correct, the heloc is a more expensive loan in every single way.

However, if instead you do smaller chunks to your heloc, in the amount of your monthly pay checks such that your entire heloc balance gets completely paid off each month, set up your paychecks to go directly towards paying your heloc, and use your heloc as you would a normal checking account, and move your bills to the end of the month then it is actually a smarter way to do things. This is because with this method, the majority of the time you have no balance at all on your heloc since you moved your bills to the end of the month. With this method roughly 3 out of every 4 weeks there is no balance, meaning you only pay roughly 1 week worth of interest. or (7/30)*5.9= 1.37% per month.

So which would you rather have, 100k loan at 4.7%, OR a 90k loan at 4.7, and a 10k heloc at an effective 1.37?

This method isn't some magical way to pay off your loan in 7 years, however it will take 2-4 years off of a standard 30yr loan without having to make additional over payments. Given how rare it is for a loan to run its full term, it could be debated that the hassle of setting it up isn't worth the relatively low gain, however if you know that you will keep the house for the full 30 years it IS the smarter way.

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Joe SplitrockPro Member

Moderator

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

7y

Originally posted by @Ben Zimmerman:

I believe I already explained it, many people on this thread seem to (incorrectly) advocate doing large chunks on your heloc of lets say 30k, and carry forward balances on their heloc from month to month taking a year to slowly pay down that heloc until they are able to repeat the process, in which case you are absolutely correct, the heloc is a more expensive loan in every single way.

However, if instead you do smaller chunks to your heloc, in the amount of your monthly pay checks such that your entire heloc balance gets completely paid off each month, set up your paychecks to go directly towards paying your heloc, and use your heloc as you would a normal checking account, and move your bills to the end of the month then it is actually a smarter way to do things. This is because with this method, the majority of the time you have no balance at all on your heloc since you moved your bills to the end of the month. With this method roughly 3 out of every 4 weeks there is no balance, meaning you only pay roughly 1 week worth of interest. or (7/30)*5.9= 1.37% per month.

So which would you rather have, 100k loan at 4.7%, OR a 90k loan at 4.7, and a 10k heloc at an effective 1.37?

This method isn't some magical way to pay off your loan in 7 years, however it will take 2-4 years off of a standard 30yr loan without having to make additional over payments. Given how rare it is for a loan to run its full term, it could be debated that the hassle of setting it up isn't worth the relatively low gain, however if you know that you will keep the house for the full 30 years it IS the smarter way.

Your example is assuming someone can make an extra payment of $10K PER MONTH. In your example that means a $100K loan would be paid off in 10 months, so you are not taking 2-4 years off a 30 year loan, you are taking off 29 years! The point is that most people will put the $10K on their HELOC and will carry it for months or years, so your example of floating 1 week of interest isn't reality. The average person may be able to pay $500 extra to principal each month, so that would be more realistic. The problem is using REAL numbers doesn't prove your point, because $500 at 1.37% interest for a year is $9.65 and at 4.7% interest, it is $23.50. So that would save you $13.85 per year in interest. Once you figure in fees for opening the HELOC, it would be a net loss over the life of the loan.

Even using your unrealistic example, floating that $10,000 would cost you $193 per year on the HELOC versus $470 on your mortgage at 4.7%. That would be $277 per year in interest savings, but since the $90K loan would be paid off in 9 months, it would be closer to $200 savings. It is going to cost you more than $200 to open the HELOC, so even in your example it is a net loss using the HELOC.

It is the extra principal payments that pay down a mortgage faster. Whether you pay the extra principal directly or through a HELOC, will yield roughly the same acceleration. The difference is the total cost using a HELOC will be higher.

My frustration with people advocating velocity banking is the deceptive examples. There is always a trick used when presenting the numbers. If you mathematically model two real situations, it always proves the HELOC is more expensive (extra principal directly to mortgage versus through a higher rate HELOC).

I am not saying you or anyone in particular is trying to deceive people. In most cases, I think it is just people misunderstanding math. Hence the reason another person in this thread said, "I can't explain why it works, but it does." This isn't magic, it is math.

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Brian CardwellPro Member

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

7y

@Joe Splitrock glad you finally understand that it works. Using the HELOC method may not be the cheapest way but it is definitely a way that works if done correctly. As I showed in my example earlier in this post, the numbers are real world give or take a few dollars. There is no deception in my example. Be fair here bro . The numbers you presented are the fake numbers (deceptive). The ones I presented were very close to my actual numbers. So please don't call my numbers deceptive, when they are not.

So if the average person can do $500 a month. Then they would pay off their loan in a little over 15 years. They can choose to use a heloc method or put the $500 directly on the principle. If they use the HELOC method they will still have access to that extra money.

On a second note, $500 extra a month is not a good financial position to be in. That person needs to fix their financial position before they start doing either.

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Ben Zimmerman

Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes

7y

@Joe Splitrock You are misunderstanding me. In my scenario you are not making extra 10k / month overpayments. This is in stark contrast to what @Brian Cardwell has been saying, in his arguments you do make overpayments and the loan gets paid off ninja fast due to those overpayments and not because of the heloc.

In my scenario, in the FIRST month you do make a 10k payment towards the mortgage (in the amount of your monthly paycheck), but this is because you will eventually pull that same money right back out via your heloc. So it is a 10k payment, and a 10k withdrawl, which means there is a net of no additional payment as you still have a 100k total loan (90 on the mortgage, 10 on the heloc). All months after the first you make the mortgage payment completely as you normally would, and your 10k monthly paycheck goes towards paying off your heloc balance in it's entirety. If done properly you should only have a balance on your heloc for a few days at the end of the month, and will be paid of in full on the first of the next month with your paycheck. This prevents that 10k paycheck from sitting in your bank account earning no interest until it is time to pay bills, and instead immediately goes to pay down the mortgage, and then only costs you interest when you finally decide to withdraw the money via your heloc for a few days at the end of the month to pay those same bills.

I will attempt to show this in the attached spreadsheet. The first tab is a standard 100k loan at the stated 4.75% interest rate with no overpayments.

The second tab is the same 100k loan using the heloc method. On day 1 of the first month, you make a 10k overpayment, and will then take that money right back out via your heloc to pay your bills. This translates into a 90k balance on your mortgage, and 10k heloc so there is no actual overpayment since all 100k is still accounted for, it is just split into 2 different balances instead of one singular 100k loan. You will pay interest on your heloc balance, which if you can push your bills back far enough into the month to only pay 1 week worth of interest, that turns a 5.9% heloc into an effective 1.37% loan. This means each month you will pay roughly $11.47 in interest, and an extra $8.33 in heloc fees if your lender charges $100/year to keep the account open. Over the life of the loan this means the heloc will cost you a little over $5700. This means that you will pay roughly an extra $19.81 / month to your heloc using this method. Under this scenario your loan is paid in full after 24.25 years.

Tab 3 contains a regular 100k loan with monthly overpayments in the amount of $19.81 per month to simulate what would happen if you made an overpayment in the amount that your heloc costs you each month. Under this scenario your loan pays off in 27.75 years, or 3.5 years SLOWER.

Tab 4 is my feeble attempt to show the flow of money into and out of the heloc. The basic premise is that your paycheck gets direct deposited into your heloc account, and you use your heloc to pay all of your monthly bills. You want to push all of your bills back as far into the month as possible before paying them in order to pay as little interest as possible. Each month when you get paid, you want your paycheck to pay off the entire heloc balance such that nothing stays on your heloc for more than a handful of days.. If done properly this allows you to keep a very low balance on your heloc for the majority of the month, and a very high balance for only a few days at the end of the month. In my scenario I said that ALL bills were due on the 23rd of each month. Obviously real life scenarios will be more messy since some bills will have different due dates, but this gives you the basic idea of how the system should work.

Summary: Everyone who advocates doing very large chunking on a heloc that takes many months to pay off is incorrect, because if a balance remains on a heloc for the full 30 days, then simple math says that a 5.9% loan is worse than a 4.75 loan. However, if done properly and in small enough amounts such that you do not carry forward a balance from month to month on the heloc, and instead only keep a balance on the heloc for a handful of days then it can be very beneficial as it takes a portion of that 4.75 loan, and turns it into an effective 1.37% loan. The method is obviously dependent on how far back into the month you can push the majority of your bills, as this lowers the actual amount of interest that you will pay on your heloc balance. Also, the higher your household monthly earning, the better this technique works. As a family that earns 10k / month will be able to shift more onto their heloc than a family earning 7k / month. Also it goes without saying that it depends on the interest rate of your heloc versus your regular mortgage, and how much fees your lender charges. This method isn't magically going to eliminate decades from your loan, but for some people, under the right set of circumstances, it can be beneficial.

Heloc Loan spreadsheets

2 Reply

Brian CardwellPro Member

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

7y

@Ben Zimmerman

This is very similar to what I did. The concept is actually about the same. If you look at my break down earlier in this thread, you will see that I have a five month horizon on paying off the HELOC. I still park my paycheck in the HELOC so that limits my exposure to the interest from the HELOC. So I think we are more similar than different.

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Joe SplitrockPro Member

Moderator

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

7y

@Ben Zimmerman I understand the concept. You are saying the effective rate of interest on that $10,000 is 1.37% versus 4.7% because you are only holding a balance for week of the month during a "float period". You also need to figure in the lost savings interest by not having the cash in your account. You can get at least 1.75% interest on a no minimum balance savings account. So for those other 3 weeks of the month, you are missing out on an effective rate to 1.31%. We can calculate the spread (4.7%-1.37%-1.31%=2%). You would end up saving around 2% interest on that $10,000 annually. That works out to $200 and after subtracting the $100 HELOC fee it saves you $100 per year.

The question is if the risk is worth the $100 and having no cash reserves. What if you lose your job? What if you make an error in timing your expenses and carry the balance at a higher rate for months on the HELOC? Look at the example @Brian Cardwell just gave of carrying a HELOC balance for five months. The higher rate on the HELOC makes it more expensive in his case.

Maybe people like the idea of forced savings. You are always running a negative balance, so maybe psychologically it reduces your spending. I can see that benefit. On the flip side using a line of credit to pay bills can be risky if you don't have the discipline to pay it off every month.

2 Reply

Brian CardwellPro Member

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

7y

@Joe Splitrock If you lose your job you are up the creek either way. 🤭 You are also absolutely correct. This method does take some discipline. I was transparent with that also. There are many ways to skin a cat. (Sorry Peta) At the end of the day we get the same results. Paying the loan off early.

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Has anyone ever used the Velocity Banking Strategy?

Has anyone ever used the Velocity Banking Strategy?

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