Has anyone ever used the Velocity Banking Strategy?

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.

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Michael Lucero

Rental Property Investor · Pasadena, CA · Member since 2016 · 164 posts · 149 votes

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.

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Ben Zimmerman
Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
7y
@Joe Splitrock I completely agree with you in that the benefit is relatively small, and that the risk may outweigh the reward. In fact I don't use this method myself and have no intention of using it in the future.
However, this is an educational forum, it isn't a playbook that spells out step by step instructions of what people should do. In the end it doesn't matter if someone uses the method or not, it only matters that they were informed about a strategy and then evaluated their lifestyle and financial position and determined if it was worth implementing or not based on their own unique circumstances.
For the previous 9+ pages (of what I've read) it has largely been people on one extreme or the other about the topic. Some were bashing the technique saying that it doesn't work and that it is all smoke and mirrors with flawed math, while others seemed like snake-oil fanatics claiming it will pay off your loan in under 7 years and that everyone else "just doesn't understand". I didn't intend to persuade anyone that the method was worth it and that they should use it, only that the method can work.
If people choose to use this technique or not is up to them. (I will continue to choose not to). But acknowledging the fact that it can work is a necessary first step for the reader to determine if it is worth implementing.
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Jim Macedon
Round Rock, TX · Member since 2017 · 86 posts · 45 votes
7y
Just intuitively, it's hard to fathom how this could be beneficial, but my intuition has been wrong before. If I have the extra money to pay the payment on the HELOC, why wouldn't I just use that extra money to pay down the mortgage? I pay nothing on the money if I send it directly to the mortgage, and I pay 10% or whatever if I send it to the mortgage via the HELOC. I don't see how that's a good idea.
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Brian CardwellPro Member
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
7y
So @Jim Macedon
When you place your paycheck in the HELOC account, you satisfy the HELOC minimum payment.
Now the for the second question. If you take the extra money and put it on the primary mortage, then you don't have easy access to that money any more.
Lastly I have my heloc at prime -.50. Where does the 10% come from? Just curious because it isn't the first time I have heard a number like that.
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Jim Macedon
Round Rock, TX · Member since 2017 · 86 posts · 45 votes
7y
Let's say the HELOC interest rate is 1%. So if I pass my money through the HELOC to the mortgage, I'm paying 1% on my extra mortgage payments. If I just pay that exact same amount to the mortgage, I'm paying 0% on it.
At least that's what makes sense to me. Maybe I'm missing something.
1 Reply
Brian CardwellPro Member
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
7y
You are absolutely correct
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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 @Brian Cardwell:

So @Jim Macedon
When you place your paycheck in the HELOC account, you satisfy the HELOC minimum payment.
Now the for the second question. If you take the extra money and put it on the primary mortage, then you don't have easy access to that money any more.
Lastly I have my heloc at prime -.50. Where does the 10% come from? Just curious because it isn't the first time I have heard a number like that.
I never was able to follow the "easy access to your money" argument. Whether you pay down your mortgage directly or through a HELOC, the money ends up in the equity of the property. No different. The HELOC is just a line of credit, so the "access" you refer to is not cash, but a line of credit, no different than a credit card or any other personal loan.
The best argument against this method is that it advocates running a negative cash balance at all times. You never have cash - you just have access to credit. They are two different things and people try to imply they are the same. I have even heard people refer to this as a "HELOC Savings Account", which shows the complete lack of financial literacy of people advocating this method.
What happens if you lose your job? Yes, you can use the HELOC to pay your mortgage and you can even use the HELOC to pay the HELOC, but without principal pay down, the balance spirals out of control quickly.
It is just risky to not have cash salary reserves in the bank.
As far as rates on HELOC, most are going to be over prime by a point or more. Usually anything under prime is a teaser rate that goes away or involved upfront fees. This means many HELOC are over 6% now. Over the last few years people locked in rates in the 3% and 4%. When rates are going up, HELOC method is even more dangerous because you are replacing low rate debt with higher rate debt.
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Brian CardwellPro Member
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
7y
@Joe Splitrock
The "easy access" is in the line of credit. The line of credit is as easy to access as ones checking account. Much different than just having equity in ones home. If you can't see that then maybe this isn't for you. If you just pay your extra directly to the primary mortgage, the money is gone. You don't have easy access to it. So not only do you not have access to "cash" , you also don't have access to "credit " either. Hmm.
If one loses their job, in either case it is going to be a rough road to travel.
As far as rates on a HELOC. Maybe you should shop around and find better rates.
As of October 12, 2018, margins range from 4.750% to -0.500% for lines of credit from $25,000 to $499,999. It is still this right now. This from one of the largest lenders in the USA. This is not an intro rate either. So lets spin this fairly.
If you don't like this method, that is cool. Don't use it. I would just ask that you give accurate information. Don't split hairs with words. The bottom line is this method works. I and others have used it. I have nothing to gain from sharing what I have learned from doing it. Again if YOU dont like it, it's cool.
No one is saying not to have cash reserves. One needs to have their financial business in order before doing this. This method is for people that are financially sound.
1 Reply
Angel Moreno
Lancaster, CA · Member since 2015 · 28 posts · 3 votes
7y
Due to BK process, my HELOC has been closed. How does Velocity Banking work with Secured Credit Card? I don't qualify for any other credit opportunities
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
7y
Originally posted by @Ben Zimmerman:

@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
So based on your spreadsheets, it would appear that the bottom line is that we would be trying to capitalize on the fact that a HELOC is calculated on a daily basis, whereas a traditional mortgage is not, correct? Couldn't we draw from the HELOC just one day before payday thereby accruing just one day's worth of interest?
0 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Tony Kim:

Originally posted by @Ben Zimmerman:
@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
So based on your spreadsheets, it would appear that the bottom line is that we would be trying to capitalize on the fact that a HELOC is calculated on a daily basis, whereas a traditional mortgage is not, correct? Couldn't we draw from the HELOC just one day before payday thereby accruing just one day's worth of interest?
What is the point of drawing from your HELOC the day before your paycheck? His example assumes perfect timing. So the idea is you pay off $10,000 with the HELOC, the day before your mortgage recalculates interest for the month. All your other bills are due around the same time and you pay it all from your HELOC. Then a week later you get paid and pay off the HELOC. It sounds good but in reality expenses don't occur this way. You can't pick the billing date for most bills so more realistically you are paying interest at least half the month or the whole month for some portion.
There are more problems with the example, the main one being that the example is not realistic. How many people with $100,000 houses have $10,000 a month in expenses to float on a HELOC?
1 Reply
Scott L.
Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes
7y
Originally posted by @Tony Kim:

Originally posted by @Ben Zimmerman:
@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
So based on your spreadsheets, it would appear that the bottom line is that we would be trying to capitalize on the fact that a HELOC is calculated on a daily basis, whereas a traditional mortgage is not, correct? Couldn't we draw from the HELOC just one day before payday thereby accruing just one day's worth of interest?
Conforming mortgage interest is calculated on a daily basis. Unless the HELOC interest rate is lower than the mortgage, there is no interest savings. The amount of savings on timing of bills due vs. drawing on the HELOC between paychecks is negligible, and at most would be a one time recapture of working capital roughly equal to one month worth of bills to apply to the mortgage.
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
7y
Originally posted by @Scott L.:

Originally posted by @Tony Kim:
Originally posted by @Ben Zimmerman:

@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
So based on your spreadsheets, it would appear that the bottom line is that we would be trying to capitalize on the fact that a HELOC is calculated on a daily basis, whereas a traditional mortgage is not, correct? Couldn't we draw from the HELOC just one day before payday thereby accruing just one day's worth of interest?
Conforming mortgage interest is calculated on a daily basis. Unless the HELOC interest rate is lower than the mortgage, there is no interest savings. The amount of savings on timing of bills due vs. drawing on the HELOC between paychecks is negligible, and at most would be a one time recapture of working capital roughly equal to one month worth of bills to apply to the mortgage.
Typically no. Mortgages are generally calculated on a monthly basis. The exception would be if you had a simple interest mortgage. Has nothing to do with whether or not it is conforming.
In any event, I've spent the last 30 mins trying to see the merits of this strategy and I've pretty much lost interest. Benefits seem negligible.... plus, I'm locked in at 3.25% for the next 28 years. Why mess around with a variable rate HELOC which could balloon at any time and also waste time micromanaging the timing of my bills. No thanks...
1 Reply
Scott L.
Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes
7y
Originally posted by @Tony Kim:
Originally posted by @Scott L.:

Originally posted by @Tony Kim:
Originally posted by @Ben Zimmerman:

@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
So based on your spreadsheets, it would appear that the bottom line is that we would be trying to capitalize on the fact that a HELOC is calculated on a daily basis, whereas a traditional mortgage is not, correct? Couldn't we draw from the HELOC just one day before payday thereby accruing just one day's worth of interest?
Conforming mortgage interest is calculated on a daily basis. Unless the HELOC interest rate is lower than the mortgage, there is no interest savings. The amount of savings on timing of bills due vs. drawing on the HELOC between paychecks is negligible, and at most would be a one time recapture of working capital roughly equal to one month worth of bills to apply to the mortgage.
Typically no. Mortgages are generally calculated on a monthly basis. The exception would be if you had a simple interest mortgage. Has nothing to do with whether or not it is conforming.
In any event, I've spent the last 30 mins trying to see the merits of this strategy and I've pretty much lost interest. Benefits seem negligible.... plus, I'm locked in at 3.25% for the next 28 years. Why mess around with a variable rate HELOC which could balloon at any time and also waste time micromanaging the timing of my bills. No thanks...
No. On all standard (the ones 99% of us get) amortizing mortgages, simple interest is charged daily on the outstanding balance for the number of days between payments, scheduled or otherwise. The initial amortization schedule is calculated on equal monthly payments on the exact due date, but if you pay during the grace period, the interest continues accruing until the payment posts. Principal payments received between due dates reduce the principal balance from the day posted.
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
7y
Originally posted by @Scott L.:
Originally posted by @Tony Kim:
Originally posted by @Scott L.:

Originally posted by @Tony Kim:
Originally posted by @Ben Zimmerman:

@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
So based on your spreadsheets, it would appear that the bottom line is that we would be trying to capitalize on the fact that a HELOC is calculated on a daily basis, whereas a traditional mortgage is not, correct? Couldn't we draw from the HELOC just one day before payday thereby accruing just one day's worth of interest?
Conforming mortgage interest is calculated on a daily basis. Unless the HELOC interest rate is lower than the mortgage, there is no interest savings. The amount of savings on timing of bills due vs. drawing on the HELOC between paychecks is negligible, and at most would be a one time recapture of working capital roughly equal to one month worth of bills to apply to the mortgage.
Typically no. Mortgages are generally calculated on a monthly basis. The exception would be if you had a simple interest mortgage. Has nothing to do with whether or not it is conforming.
In any event, I've spent the last 30 mins trying to see the merits of this strategy and I've pretty much lost interest. Benefits seem negligible.... plus, I'm locked in at 3.25% for the next 28 years. Why mess around with a variable rate HELOC which could balloon at any time and also waste time micromanaging the timing of my bills. No thanks...
No. On all standard (the ones 99% of us get) amortizing mortgages, simple interest is charged daily on the outstanding balance for the number of days between payments, scheduled or otherwise. The initial amortization schedule is calculated on equal monthly payments on the exact due date, but if you pay during the grace period, the interest continues accruing until the payment posts. Principal payments received between due dates reduce the principal balance from the day posted.
You just described (for the most part) a mortgage calculated on a monthly basis. A simple interest mortgage, which actually calculates based on a daily balance, results in monthly payments that vary slightly from month to month. If your mortgage payments vary from month to month, then you have a simple interest mortgage that truly does calculate daily. If not, then like 99% of the rest of us, you have a standard mortgage that is calculated on a monthly basis.
We're getting off topic... feel free to PM if you still feel like continuing this.
1 Reply
Scott L.
Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes
7y
@Tony Kim PM sent. Of course going "off topic" is exactly how the purveyors of Velocity Banking or HELOC Double Secret Prime strategy, or whatever they're calling it these days, get these threads going for 500+ posts. I've been on this one for over a year. :-)
The only advantage that these strategies have is the psychological advantage of dedicating one to using extra cash to pay debt rather than spending it on current consumption. Unfortunately, that is often outweighed by the additional interest and fee cost associated with some of these products and the complexity. However, like the alchemists in search of a formula for turning lead into gold and the inventors searching for a perpetual motion machine....hope springs eternal.
1 Reply
Brian CardwellPro Member
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
7y
Wow @Scott L. and @Joe Splitrock
Just because you don't like it the tool doesn't mean you have to bash it the way you continue to do. The process works. As usual, the ones that don't understand put out false/ bad information.
@Tony Kim
So if you have a 200k loan @3.25% , you will pay approximately 113k in interest over the life of the loan. If you use the velocity method at 10k every 5months, you will pay appoximatey 22k in interest over the life if the loan (approx. 7years). Looks like to me you will save at least 90k in interest payments. I don't know what you owe on your mortgage so I used the number I use most of the time. (NOT 100k). The savings isnt made on the timing of paying your bills. Don't let that misinformation fool you.
This isn't for everyone as has been said earlier. One needs to be financially sound and discipline to make this work.
FYI the sky isn't falling. I have a interest cap on my Heloc I am not really concerned with the slow increase in interest rates either way.
1 Reply
Ben Zimmerman
Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
7y
Which bills exactly can you not move? Credit card, telephone, electric, all of these bills have the option to move the due date to whatever day you want, (up until the 28th of the month, thanks a lot February...) Which means your average bill would generate only 2 or 3 days worth of interest per month on the heloc. This turns a hypothetical 5% heloc loan rate into something closer to a .5% interest loan if utilized properly.
Also, you mention you didn't like my example of a 100k house and a 10k monthly income. However these numbers don't matter and you can choose whatever you like, maybe 200k with a 10k income? How about a 300k house? It makes no difference, the only thing that matters is you are taking a small part of your average 4.75%ish mortgage, and turning that portion of it into an effective sub 1% loan by moving your due dates and utilizing a heloc effectively.
@Scott L. Mortgages are typically calculated on a monthly basis. This is easily verified with a simple google check, or by looking at the balances on any mortgages that you might have that you make bi-monthly payments instead of the traditional method since a bi-monthly payment would pay a portion of the balance at different times of the month. The amortization schedule matches a bi-monthly schedule exactly up until the point where you reach a month where you made 3 payments instead of two which obviously pushes you ahead.
0 Reply
Brian CardwellPro Member
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
7y
@Ben Zimmerman,
I never said it was because of the HELOC that the mortgage was paid off earlier. I think we all are in agreement that we are putting more money towards the principle. The question is how are you going to do it. There are many ways to skin a cat. If you are going to quote me please be accurate. Seems as though you didn't read the thread. I totally understand that if you didn't.
So here is the problem with these post. These post are not as detailed as they should be if this were a "how to" on velocity mortgage technique. It isnt.
Also so that you and others understand, I have used this tool and it worked as described. Some of the details that you and others seem to want to point out, would take a book to write about it all. Those that have read these post should know how to start and if they need more details should also know how to get the details. I won't go into all those ways. I also am not an expert on this technique. I just feel inclined to correct those that come to this forum and bash something that I know works and have done. If I hadn't used this to eliminate my mortgage, you would never hear from me. Those that say it doesn't work, either have never used the tool, don't understand the tool, or just want to be a negative nanny.
If one paid cash for their home, we wouldn't be have a discussion about mortgages, would we? Again I didn't say I saved 90k. Reread my post above. If you are going to pick apart my post, please be accurate.
0 Reply
Philip Williams
Rental Property Investor · Rockford, IL · Member since 2014 · 385 posts · 702 votes
7y
Good Lord this thread is annoying!! I thought at some point people would stop going around in circles. Admin make it stop lol
0 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Brian Cardwell:

Wow @Scott L. and @Joe Splitrock
Just because you don't like it the tool doesn't mean you have to bash it the way you continue to do. The process works. As usual, the ones that don't understand put out false/ bad information.
@Tony Kim
So if you have a 200k loan @3.25% , you will pay approximately 113k in interest over the life of the loan. If you use the velocity method at 10k every 5months, you will pay appoximatey 22k in interest over the life if the loan (approx. 7years). Looks like to me you will save at least 90k in interest payments. I don't know what you owe on your mortgage so I used the number I use most of the time. (NOT 100k). The savings isnt made on the timing of paying your bills. Don't let that misinformation fool you.
This isn't for everyone as has been said earlier. One needs to be financially sound and discipline to make this work.
FYI the sky isn't falling. I have a interest cap on my Heloc I am not really concerned with the slow increase in interest rates either way.
It is not the HELOC that makes a difference here. It is the $10,000 extra principal payments every 5 months. Of course if you pay an extra $2000 every month to a $200K/30 year loan, you can pay it off in 7 years. Use a credit card and you will get the same results as a HELOC. Or just pay the mortgage down directly, like I have stated many times in this thread.
There is only ONE WAY to pay off a mortgage early. That is by making EXTRA PRINCIPAL PAYMENTS.
2 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Ben Zimmerman:

Which bills exactly can you not move? Credit card, telephone, electric, all of these bills have the option to move the due date to whatever day you want, (up until the 28th of the month, thanks a lot February...) Which means your average bill would generate only 2 or 3 days worth of interest per month on the heloc. This turns a hypothetical 5% heloc loan rate into something closer to a .5% interest loan if utilized properly.
Also, you mention you didn't like my example of a 100k house and a 10k monthly income. However these numbers don't matter and you can choose whatever you like, maybe 200k with a 10k income? How about a 300k house? It makes no difference, the only thing that matters is you are taking a small part of your average 4.75%ish mortgage, and turning that portion of it into an effective sub 1% loan by moving your due dates and utilizing a heloc effectively.
@Scott L. Mortgages are typically calculated on a monthly basis. This is easily verified with a simple google check, or by looking at the balances on any mortgages that you might have that you make bi-monthly payments instead of the traditional method since a bi-monthly payment would pay a portion of the balance at different times of the month. The amortization schedule matches a bi-monthly schedule exactly up until the point where you reach a month where you made 3 payments instead of two which obviously pushes you ahead.
You are not really setting the due date as much as you are the payment date. The reason some companies offer this is so that you can match your pay check dates. It is for people who live paycheck to paycheck and lack self control. The idea is, the money comes out the same day as your paycheck, so you don't have a chance to spend it.
If any bill gives you the option of when to pay, always set the latest possible payment date. Why would you pay a bill on the 5th of the month if you could push it to the 28th? In your example, you would just be carrying the balance on your HELOC and paying interest on a bill you could just defer.
Every bill I have is set to pay on the due date. If I can pick a due date, I pick the latest date. I never pay anything early, unless there is some financial benefit, such as early payment discount or avoiding interest.
I do agree with you that common practice for fixed rate mortgages is that they are calculated on a monthly basis. HELOC on a daily basis, because it is a revolving account that can see an increase or decrease daily.
So on a fixed rate mortgage, when making extra principal payments, try to time them right before the interest recalculates. That being said, a few days worth of interest is not much money. For example, $1000 at 3.25% interest is nine cents a day.
0 Reply
Scott L.
Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes
7y
@Ben Zimmerman You say "@Scott L. Mortgages are typically calculated on a monthly basis. This is easily verified with a simple google check, or by looking at the balances on any mortgages that you might have that you make bi-monthly payments instead of the traditional method since a bi-monthly payment would pay a portion of the balance at different times of the month. The amortization schedule matches a bi-monthly schedule exactly up until the point where you reach a month where you made 3 payments instead of two which obviously pushes you ahead."
This is simply incorrect, unless you're changing the definition of "daily". Mortgage interest is calculated on the daily balance of the principal outstanding. Equal payment's are due monthly and the amortization schedule is recalculated every time a payment is received on other than the exact due date in the original table.. This is what daily means.
1 Reply
Ben Zimmerman
Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
7y
@Scott L.
Please cite your references then, because this goes against what I have personally experienced when I made additional monthly payments, and goes against literally every google website that I have viewed. Are there mortgage loans that are calculated daily? -Sure there are simple interest mortgages out there, but the traditional mortgage that 99.9% of people use is calculated on a monthly basis, which is good for the consumer because it is the generally the cheaper option of the two.
@Joe Splitrock Yes, most people realize you can choose the day you pay, generally this is done due to the reasons you mentioned. What most people don't realize is that you can also change the actual due date (and thus the pay date) on all of the bills. If you read the screenshot from my electric company it says, "The due date you select becomes the date your SRP payment is due". Here is another screenshot from my credit card that shows the revised due dates if I so choose to alter it.
0 Reply
Scott L.
Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes
7y
@Ben Zimmerman
The "simple interest" mortgage definition in Investopedia doesn't really make sense, because it doesn't define what "calculating interest monthly" vs. "calculating interest daily" means. If you calculate interest by dividing 5.00% by 365 and apply it to the principal balance every day for a year, it is no different than dividing it by 12 and applying it at the end of each month when the normal payment is applied. What everyone is arguing about, is what happens when you pay a payment before (or after) the due date, or make an extra principal payment during the month. What happens on both standard amortizing mortgages and HELOCs, is that the principal balance on the loan is reduced by the payment minus the interest accrued to that DAY, and the interest for the next payment due, is recalculated.
Virtually all amortizing loans are "simple" interest in the sense that there is no "interest on interest" or compounding, because every scheduled payment covers more than the interest accrued between payment posting dates unless you default.
1 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
@Ben Zimmerman why would you ever schedule a payment to be due any earlier than the latest possible date?
@Scott L. thanks for the explanation. This was discussed earlier in the thread and I forgot some of the discussion. I think the determination was calculating monthly versus daily made no difference over the long term. Short months have more interest per day than long months, but it is minimal and averages out.
What I have never been fully clear on is when the lender will apply extra principal payments. You are indicating they apply the payment the day it is received, so you immediately start saving interest within that month.
When I have paid off mortgages, that the lender gives a pay off balance as of the day the payment is made. They are careful to caution if the check arrives a day late, that one more days interest must be paid. That would only be possible if they are using daily principal balance for interest accrual.
0 Reply

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