All Forum Posts by: Joshua S.

Brent, I just covered this in my response to Chris John, so please read that for clarification. The money in question is coming from the interest savings, it's not money that's lying around. That's why the question is incorrect. You're asking, "What's the best way to invest money that I don't have, because I haven't saved it yet?". It just makes no sense. In other words, moving a portion of your mortgage to the HELOC is something anyone can do whether they are scraping the bottom of their checking account every month or have a few thousand extra lying around. What I'm asking you to imagine is the person who is scraping. That person can use this strategy to save money on interest without having extra money just lying around. Once you grasp that it's not about the extra money a person has, you'll understand the strategy.

That's the thing that people can never understand. I don't have $25K/year extra just sitting in my account (see above, that's what I've been able to pay extra over the last two years). If I did, then I WOULD have a choice to make - should I invest these funds or pay my house down faster?

The extra money that's going toward my mortgage IS COMING FROM THE STRATEGY ITSELF, that's what people don't understand. When I pay the mortgage the normal way (and remember, I did this for years, so I know that depending on other bills, I'd have $5-$6K in checking pretty consistently), I'm paying about $20K in interest and taking about 2 years to pay down the first chunk of $10K on the mortgage. It's true, you can go calculate it on your own mortgage, but if it's an average size loan you should get somewhere in that range.

When I move that same $10K over to the HELOC, it costs me about $1000 and 6-8 months to pay down depending on other bills. That difference - $20K vs $1K savings is where the extra money is coming from to pay down my principal. People think it's financial voodoo and don't want to believe it, but it's not. The $10K chunk of my mortgage costs so much to pay down normally, because I'm paying for interest on the whole loan as I do it. Now if I just had an extra $10K lying around in my checking account to pay down the mortgage every six months, then your discussion would be valid - "Why don't you just invest that money in the S&P 500 or pay it directly to principal?" - but I don't. Most people don't. And the extra money people do have is going toward saving and investing and therefore they don't want to put it toward the mortgage, anyway, so it's a circular argument.

Hopefully you and other people can understand this at some point. No one is sitting around with extra tens of thousands of dollars and comparing it to this HELOC strategy. The idea of the strategy is just that's a better, more efficient way to pay off the mortgage WITHOUT having to have a bunch of extra money lying around. In other words, it's a self-defeating argument that makes no sense. It'd be like if I told you I was thinking about buying a hybrid car to save on gas and your counterargument was that I shouldn't do it, because if I had a solar powered jetpack I wouldn't need to pay for gas at all. I would stare at you blankly until you realized how much of a nonsense words you just said and now I wish you would say right or get out of my house.

When I'm talking about using a HELOC to pay the mortgage, the answer isn't - "Well, why don't you just pay your mortgage down with all the extra tens of thousands of dollars you have lying around that you aren't using for something else?". I mean, no offense, but doesn't that sound stupid now? Most people don't have that lying around. But this strategy CREATES EXTRA MONEY THROUGH INTEREST SAVINGS.

The whole misunderstanding people have comes from the fact that they can't understand that moving some of your mortgage balance to the HELOC helps you SKIP interest on the mortgage. You literally skip it completely. If you can't understand that, calculate how much you'll pay in interest for the rest of your mortgage and then imagine you won the lottery and paid off the house tomorrow. Do you have to pay the interest? No, you only pay the interest if you pay it back on their schedule. If you pay it back early, you skip it and it's not owed, period. This works whether you pay off the house tomorrow or pay a few thousand dollars extra to principal. If you don't believe that, calculate how much interest you owe today, then imagine you won the lottery but it would only pay off half of the house. How much interest do you owe now? Regardless of how you work it out, when you pay extra toward your mortgage, you are literally skipping the corresponding interest payments that were scheduled for that portion of the balance. It's not magic, it's just something people don't know or don't understand or something.

All I'm telling you is that using the HELOC accomplishes the same thing without having the money lying around. You skip over the $20K interest on the mortgage and pay around $1000 interest to the HELOC over 6-8 months and then you do it again. And meanwhile, all of your extra checking funds are going toward the mortgage, too, so that saves you more money on top of what I just described. There's no smoke and mirrors or anything. Paying principal back early LITERALLY LETS YOU SKIP TENS OF THOUSANDS OF DOLLARS IN INTEREST. That works whether you get a gift from your dad and owe him $10 in interest, borrow it from the HELOC and owe a $1000 in interest, or you have it lying around. The difference is that yeah, if dad hands you $10K or you have it lying around you might put it in a mutual fund, but if you take it out of the HELOC and do that, now you're going into additional debt to invest, which can be irresponsible and dangerous. But when you move a chunk of your mortgage balance onto the HELOC you're in the same amount of debt, you're just paying a lot less interest on one portion, so there's no danger.

Anyway, hope this clarifies, I just think it's a shame that people can't understand this. They want to turn it into the jetpack argument instead of understanding that the extra money in the system comes from HOW you pay the debt off, so there's no way or reason to compare it to "just taking your extra money and investing it".

Sorry, let me clarify what I'm talking about, because it's unfathomable that a bunch of people who are supposedly into investing and finance can't get this and I feel like I must be explaining it wrong.

Hypothetically, when your income comes in, you put $1000 each into three buckets:

1. Stocks and mutual funds. You pay yourself first through investments.

2. Savings account. You want to buy a rental at some point and you're building up your cash.

3. Checking account. You need to pay your mortgage, car, electric, water, phone, etc.

Now, here's where it gets super tricky, I guess, so I'll try to be as clear and concise as possible:

DON'T TOUCH THE FIRST TWO. KEEP DOING THOSE. DON'T CHANGE THEM. 

Now here's the point. The third one. Number 3. The money that's just sitting there all month in your checking account waiting to be used. That money could be helping hold your mortgage balance down and save you money on interest. That's the point of the strategy and it's unequivocally, undeniably, unquestionably ***BETTER*** than just letting it sit there while you wait for bills. 

Now you can do what you want with that information. You can do it, not do it, deny it, agree with it, write it out on paper and ball it up and shove it - that's up to you, but it's the truth and there's no way to change it. Putting your disposable income - your "checking account" funds against your mortgage is BETTER than letting it sit there doing nothing for you. That's all I'm trying to help people understand. Hope this clarifies for everybody! Good luck.

That's cool, but this is what's hard about this subject. No one said anything about investments or savings. I said that it's obvious that every person would want a mortgage that also acts like a line of credit and that's true. It's irrefutable. Any honest, intelligent person can see that there would be benefits to having a set up like that. It doesn't matter what you're doing in terms of investments or savings aside from this. Having a mortgage that functions like a line of credit where your CHECKING ACCOUNT FUNDS can go against your mortgage and then still be used to pay your bills is superior to letting your CHECKING ACCOUNT FUNDS sit around. You can "not want to do it" - great. It's still superior. So, do it or don't do it, but it's better than letting your money sit around, so I'm just getting the word out. Have a good one. :) 

Just a quick update - strategy still going really well. People are missing out bigtime. 

Here's a question for anyone who wants to play. If you could have the exact same mortgage you have now EXCEPT that it functioned like a line of credit (ie. you can put all of your income toward it, but then still have access when you need it), would you want that?

Feel free to answer, but it's rhetorical. Obviously, you would want that. If you answer no you're clearly being dishonest. It's simple - your money helps keep your interest costs down while you wait for your bills to come due. 

By moving a portion of your mortgage balance to a revolving line of credit (HELOC, etc.) you can accomplish exactly that. All of your income goes toward your mortgage every month and you still have access to it. End of story. Feel free to let me know what you might not understand. <3

People always treat velocity banking like it's voodoo or something, but it's really pretty simple. 

1. Paying additional principal toward your mortgage saves you on interest. Everyone knows this, but most people don't have a ton of money lying around to do it. Even at 4% interest you are typically paying for your house and then another 2/3rds of a house if you pay all the interest.

2. If you don't have $10K lying around, you can take it from a HELOC and put it on the mortgage. That $10K part of your mortgage typically costs around $20K in interest and 2 years to pay down on the mortgage. Look at an amortization schedule and just add up all the interest to get from $200K to $190K (example) on your loan. If you're toward the beginning of your loan, the interest cost and time it takes to pay down are ridiculous. Now here's the key: If you move that same $10K to your HELOC and put all of your extra income toward it, it will take around $1-$2K and around 6-10 months to pay down (depending on your other expenses, etc.).

That's really it. Although it's only a $10K chunk of your mortgage, it "costs" $20K to pay down, because you're also paying interest from the rest of the loan. By isolating it on the HELOC, you're able to pay it down a lot more efficiently. Then, once you pay it down you repeat the process - take another $10K chunk over to the HELOC and pay it down.

I think the main thing people don't understand is that the interest on your mortgage is accrued over time, but it's not OWED, it's SCHEDULED. So, think about it like this. You can look at your amo schedule right now and see how much interest you will pay if you stick to that schedule, but if you win the lottery and pay off the balance tomorrow, you won't pay that interest. You skip / eliminate it, because you paid it off before it could actually accrue, ie. before you actually owe it. In other words, when it's still "scheduled", it's hypothetical and you can "unschedule" it by paying it off early. This works whether you win the lotto and pay off the whole thing or whether you pay it off early in chunks (of your own money or from the HELOC).

Hope this helps. Most people can't get it and blow it off as voodoo, which is unfortunate. They think that the $10K is the same whether it's on the mortgage or the HELOC, but as I explained the cost and time to pay it off are very different depending on how you do it. This strategy is just a more efficient way to pay it down if you don't have the money lying around. Later!

 Same to you! 

Thank god, some flexibility. Seems like I'm finally getting through to somebody. :) The problem is, the time value of money isn't useful as a calculation or comparison, so it's worthless in this case. The basic theory that money is worth more now than later is true, but once you get past that there's no way to know the actual value. Am I in an income mutual fund, a savings account, or a checking account? Did I purchase a rental, make a personal loan, or buy the Yankees? Since there are so many variables, the time value of money is always incalculable and worthless as a comparison. 

But here's the other issue - that's the wrong way of thinking, anyway. Most people (probably including you) have a few thousand dollars sitting in their checking account at all times doing absolutely nothing for them. So, instead of asking what the TVM / opportunity cost is on the money I'm putting into my mortgage / HELOC, you should be asking what the opportunity cost is on letting your money gather dust in your checking account. Again, you can't really calculate or compare differences numerically, but you can definitely tell the difference between my spending money working for me all the time and yours sitting there doing nothing. I'm earning a return of X and you're earning $0, so you have the opportunity cost, not me. If you shift your thinking to be more concerned with keeping your spending money working for you, you'll see that it doesn't really matter what my return is when you compare it to "nothing".

I'll concede that if your HELOC interest is too high you can negate some of the benefits, but even that's uncomfortable to say, because I don't think it's a significant factor. The arbitrage between the two interest rates is not the issue. If you go a few pages back, I do an apples / apples comparison where the mortgage rate is 4% and the HELOC is 5% and the HELOC strategy still comes out slightly ahead of simply paying principal because of the other mechanisms at play, but that's still missing the point.

Here's the main thing I think people are always missing. You should stop thinking about your interest RATE and start thinking about your interest COST. For the average person, it costs about $21K in interest and 2 years to pay down $10K worth of principal via the amo schedule. Now YES, if you have $10K lying around that you won't miss you can throw it on the mortgage and save that amount, but I'm sure we can agree that most people don't have that money lying around or they do, but don't want to simply throw it on the mortgage. I take that $10K piece of my mortgage and put it on the HELOC and then through my natural "income in / bills out" banking, it's paid down in 6-10 months and a fraction of the interest, maybe $1000. So, stop now and think about that. I'm not talking about the interest rates or arbitrage or anything else except the COST in both time and dollars and I come out ahead every time - $21K vs $1K and 2 years vs 6-10 months.

I mean, hell, when I first started doing this strategy I used a PLOC at 8% and that was still only like $1500/year worth of interest. Obviously, a lower interest rate is important over time so you can avoid paying too much in interest, but unfortunately people have had that drilled into them so hard that they're no longer looking at the COST of the interest and that's the only important factor in this comparison. Now, of course, as time goes on the savings decreases, because less interest is owed, but early on the COST of NOT doing this strategy is MASSIVE. Moving a chunk of money over to the HELOC lowers the COST of paying it down in both time and dollars and that's what saves you money, not the arbitrage. Again, if you have an extra $10K every 6-10 months or whatever that you want to put on the mortgage, then go ahead, but if not this is a way to do the same thing. But you also have to remember, simply paying extra principal DOESN'T A) keep your money working for you all the time like I explained or B) temporarily depress your mortgage balance until you need the funds for bills, so this strategy will always be at least somewhat better.

People always bring up that they'd rather "invest" their money, but no one said anything about savings or investments - this is about your spending money / checking account. I have investments, savings, rentals, college savings for my kids, etc. - everything that you have. But I don't have a checking account that just sits there all month and that is the point. Using a revolving debt instrument and your mortgage as a "checking account" is simply more efficient banking. The combined opportunity costs for all the checking accounts across the country must be at staggering, absurd (BONKERS, RIDICULOUS, EGREGIOUS, HARROWING, INSANE) levels, but it's just accepted because that's what our parents taught us to do and nobody knows any better. Well, not while I'm around. :)

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Thomas Rutkowski:

@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)

Whether or not it makes sense to pay down the equity has been beat to death in other threads.

except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence. 

Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.

I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.

Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.

Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.

Couple weeks go by and you get another paycheck and your new balance is $4K.

Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month. 

All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.

So, you're concerned with the differences vs just paying extra principal.

Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.

Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.

Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.

Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?

Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:

Here is one months interest calculation for both:

$7,500 @ 3% for one month is $18.75

$9,000 @ 3% for one month is $22.75

Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.

The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it. 

So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.

$7,500 @ 4% for one month is $25

$9,000 @ 3% for one month is $22.75

Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.

Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.

On a $200K mortgage @ 4% your interest on the first month is $666.67. 

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.

Third Month

Your new balance is $197,419.38. Interest this month is $658.06.

My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.

My new HELOC ADB is of course $5.5K. Interest is $22.92.

$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.

So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)

The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.

So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.

My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result. 

I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.

Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.

A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.

B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.

Does this look correct to you? Both A and B are true, right?

It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:

1. How much you are able to pay down and for how many days of the month.

2. Interest rate of the HELOC versus mortgage.

One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.

But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.

To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.

I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.

The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.

My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay. 

I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.

There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.

So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.

Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.

Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.

As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.

As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half. 

Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.

I don't think you understand the explanation of the skipping thing, so I'll try to explain. 

Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

$200,000 / 30 Year / 4%

Total interest scheduled on day one: $143,739.01

Put in a lump sum $10,000 early principal payment for month one (Sept).

New total interest scheduled: $122,431.31

One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.

So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.

Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.

Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it. 

How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.

So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.

Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023). 

So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early. 

If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.

And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.

A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.

It is ironic you are saying I am immune to "simple rational explanations" and yet your response was way long and confusing. You don't skip interest payments. You pay interest based on principal outstanding. You pay interest on a mortgage or HELOC if you have a balance.

The reason you pay off a mortgage early is because the payment is a fixed amount. When you pay off principal, it reduces interest, therefore more of your payment goes to principal. In other words you accelerate your principal pay down in two ways - the extra principal payment and the extra amount from your standard payment that goes to principal. If that coincidentally makes it look like you skipped down the amortization table, then it is only a coincidence. 

Maybe we can agree to disagree. You were making some personal attacks in the last response and that is considered trolling on this site. Just don't respond if that is where you want to take this.

Ha. Yes, that response was very long. The reason is because you're not listening and I'm giving you a dozen examples hoping something will stick. You're right, when you pay $10K extra toward principal your subsequent payments are $33.34 less to interest and more to principal. But as I said, that only comes out to about $12K over the course of the loan and doesn't account for over $21K in savings. I was hoping that you'd actually be able to show the math of where the savings come from, but I guess it's not in the cards. 

The thing I will never understand is that if I win the lotto and pay off the balance on the house overnight, I eliminate / skip all the interest that is scheduled for the next 30 years. No one - including you - has disputed that. Completely eliminating / skipping mortgage interest by paying principal early is that simple if you hypothetically win the lottery or make a great investment and just have the cash to do it overnight. It's not a figment of my imagination. The idea is crystal clear that when you give back their money early, you no longer owe the scheduled interest, so you eliminated it completely. I mean, hell, you keep saying that you pay interest based on how much you owe on principal. You keep saying it over and over like a mantra. Well, the reverse is true, too. If you pay the money back early, then your interest is no longer scheduled - it's completely eliminated. So, all of that is brain dead simple to anyone reading this. 

BUT HOLD ON NOW. When you're paying the principal back early in "chunks", now you're not eliminating or skipping interest completely, it must be some other mechanism at play. It's the function of your normal payment going $30 more toward principal than before or the fact that you're saving money over the next few decades or maybe Betty White blessed my payments and made them more powerful or something. There's got to be another reason BESIDES skipping interest completely, because that only works when you're paying off the WHOLE AMOUNT all at once. I just can't figure out what could be causing the savings, you know? It's a big mystery. LOL

Anyway, yes, I'm happy to agree to disagree. Take it easy. 

Originally posted by @Bill F.:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Thomas Rutkowski:

@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)

Whether or not it makes sense to pay down the equity has been beat to death in other threads.

except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence. 

Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.

I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.

Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.

Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.

Couple weeks go by and you get another paycheck and your new balance is $4K.

Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month. 

All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.

So, you're concerned with the differences vs just paying extra principal.

Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.

Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.

Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.

Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?

Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:

Here is one months interest calculation for both:

$7,500 @ 3% for one month is $18.75

$9,000 @ 3% for one month is $22.75

Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.

The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it. 

So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.

$7,500 @ 4% for one month is $25

$9,000 @ 3% for one month is $22.75

Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.

Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.

On a $200K mortgage @ 4% your interest on the first month is $666.67. 

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.

Third Month

Your new balance is $197,419.38. Interest this month is $658.06.

My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.

My new HELOC ADB is of course $5.5K. Interest is $22.92.

$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.

So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)

The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.

So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.

My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result. 

I can see right away where the math is missing something. In month one, you are paying off $2500 more debt than me. I have $2500 in a savings account at the end of the month and you have $0. You have to look at not just loan pay down, but also cash in the bank to compare it equally. I could just pay my last $2500 into my mortgage month one and I would have $0 in my bank account too. If my checking account had overdraft protection, I could float it to pay bills. It would put me on a similar acceleration path as you, because as I said, it is all about principal pay down. I understand how it works, I am just saying it is principal pay down that reduces the mortgage, not the difference with how a HELOC calculates. That $2500 over 30 years is about $3000 in interest, but it accelerates your principal portion because mortgages are fixed payments. It is not going to pay off a 30 year mortgage in 7 years like some guru claim, but it will cut months off. I think the real power of this method is forced savings - basically the psychological benefit makes you aggressively pay down. Where if I had my choice to send the $1000 extra check or blow it, many people would blow it. If it works for you, great. I am just saying mathematically it is not some silver bullet.

Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.

A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.

B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.

Does this look correct to you? Both A and B are true, right?

It is correct to say, if you owe less principal you pay less interest (assuming the rate on the HELOC is not higher). Interest is calculated based on principal. Whether that is a HELOC or mortgage, your monthly interest is just a percent of what is owed. Statement B could be true, but it depends on two things:

1. How much you are able to pay down and for how many days of the month.

2. Interest rate of the HELOC versus mortgage.

One issue I have with the method is the scammers on Youtube who claim you will pay your mortgage off years earlier by "skipping" interest payments. They oversell the method and over emphasize the HELOC part, when in reality it is the extra principal payments that really accelerates it. They claim a mortgage is front end loaded with interest, when in fact it is evenly loaded. Interest is just a percentage of amount owed. You owe more in the beginning, therefore interest is more. That is true of any loan. They try to claim that there is something such as "amortized interest" which there is not. Amortization is just a way to calculate payments so the loan pays off at a certain term. The reality is if you are saving a few dollars a month in interest, that is all you are doing. If you are saving $2 a month over 30 years, that is $720. The point I make to people is that most of us waste more money at a coffee shop or bar than you could save using this method.

But it is a fair point to say, saving anything is good. My concern with this method is you are operating with negative cash at all times. Access to credit is not the same as cash. This can become risky if the line of credit is closed, because you have no cash emergency fund. I recommend 6 months salary emergency fund in cash (in an FDIC high yield savings account) as the best practice. If you lose your job, you have a real cash buffer. I would argue this concern is even more relevant today given the uncertain times.

To summarize, there can be marginal gain, but there is substantial risk. It is the extra principal payments that make the real difference, not the HELOC.

I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.

The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.

My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay. 

I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.

There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.

So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.

Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.

Of course I don't know everything about you, so yes I made some assumptions. Like the assumption that all your extra cash went to pay down. You implied it, but how would I know you have a savings account emergency fund? Most people using this strategy don't, which means they have a negative cash balance. The risk I was referring to is if someone loses a job and their HELOC is frozen. HELOC were frozen during the housing crisis ten years ago and it happened even when people were current on their payments. Maybe your job is 100% secure, but I know many people who showed up at work happy in the morning with a job and left without one - with no warning signs. I know people who were unemployed over a year during the housing crisis. I have 6 months salary in a high yield savings account making 2%. Could I use it to pay off a 3.25% mortgage, yes of course. I just consider it risky. Honestly in my case the mortgages are also a tax write off, so that 3.25% is more like 2.4% after tax benefit. If you have savings or investments that can be converted quickly to cash, that mitigates the risk.

As I said, it is not as simple as saying your way is better. It depends on interest rate of the HELOC versus primary and how much cash you are able to "float". In your example with your numbers, you get a few dollar benefit every month. Change the percentage on the HELOC and change increase the balance on the HELOC and it would be WORSE. The point is that it is not always better and it can be far riskier. Take for example my HELOC I have today. It is 4.5%. I just refinanced two rental properties at 3.5%. If I paid off part of a mortgage with my HELOC, I would be transferring debt to a higher interest rate. It would cost me more in interest.

As far as my comment on skipping interest payments, people who advocate this method will say you skip interest payments on the amortization table. There is a misconception that mortgages are front end loaded and that by paying a little on the front end, you skip ahead on payments, therefore avoiding those months of interest. Mortgage interest is evenly loaded in proportion to principal owed. If you pay off $1000 of a $100,000 mortgage, you don't skip interest on all $100,000. You just reduce your interest so you are only paying interest on $99,000. Maybe you understand that, but there are many videos out there where guru claim if you pay the principal portion of an early payment, you skip the interest portion. Say your first payment is $60 to principal and $500 to interest. They claim paying $60 skips the $500. This creates the false impression that by paying an extra $60 a month that you will cut your loan in half. 

Bottom line, you need to make extra principal payments every month to pay off a loan early. Whether you do it using a HELOC or just making direct payments works out about the same.

I don't think you understand the explanation of the skipping thing, so I'll try to explain. 

Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

$200,000 / 30 Year / 4%

Total interest scheduled on day one: $143,739.01

Put in a lump sum $10,000 early principal payment for month one (Sept).

New total interest scheduled: $122,431.31

One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.

So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.

Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.

Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it. 

How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.

So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.

Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023). 

So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early. 

If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.

And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.

A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.

Your entire explanation falls down here: "One $10,000 early principal payment saves $21,307.70 interest" negating the rest of the post.

A dollar today is worth more than a dollar a year from now. That $21k is comprised of dollars "saved" in years 1,2,3,...30 and all are worth less than a dollar today. So the $10k to $21k is an apples to oranges comparison. 

To make an apples to apples comparison, you'd need to find the present value of the monthly savings and see if that number is larger or smaller than $10k. In order to get the present value you need a discount rate, which will be different for everyone, but finding your individual weighted average cost of capital could get you in the ball park.

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Coming at this a different way, we could figure out when using velocity banking and regular pay down are equal:  Interest (Velocity)= Interest (Regular)

     +Interest (Regular)= Rate(mortgage)* Principal 

     +Interest (Velocity)= rate(mortgage)*(Principal-x)+ Rate(Heloc)*Average Daily Balance  where X is the amount of your Heloc applied to the mortgage. 

Setting the two equal to each other and simplifying: 

     +Rate(H)* ADB= Rate(M)*X 

Thus your ADB has to be equal or less than [rate(m)/rate(h)]*X 

In your example with Heloc rate of 5% and mortgage or 4%, your ADB has to be 80% or less of the total Heloc applied to the mortgage for this to make sense. The larger the delta between the two rates, the lower your ADB must be for this strategy to make sense. Given what we can expect to see with rates interest rates in the next 2-4 years, it doesn't bode well. 

First of all, explain this idea to me that you save over 30 years. I'm really curious about it. Here's why I think it's not true. Imagine two people that purchase houses next door to one another for the same amount, same terms. For simplicity, the $200K / 4% / 30 year mortgage we've been discussing, except neighbor #1 has an extra $50K to put down, so his balance is $150K. That extra $50K down saves him just under $36K on interest vs neighbor #2.

So, here's the question. #1 "saved" it relative to #2, meaning that it was never scheduled and can never be accrued, but you're telling me that he somehow "accumulates" these savings over the years simply because we know that his neighbor bought the other house and what he's paying in interest? According to my thinking, he saved it when he signed up for a smaller mortgage, period. Obviously, it didn't show up in his bank account or something, but he never went on the hook for it / deleted it from the calculation, so it's saved immediately. What if #2 lied and his balance is only $190K? Does that affect how much #1 saves or when? What about if neighbor #2 never existed and neighbor #1 decided at the last minute to put down the extra $50K and the savings are only relative to what he planned on doing 5 minutes ago? Does that mean that he has to collect the $36K over the next 30 years or did he just avoid going on the hook for the money in the first place and save it immediately?

Sub-question: If I decided to buy a new car just now for $30K and in the next minute I decided to buy a used car for $15K, I just saved $15K, but how long do I have to wait to collect it? 60 months? 75 months? Or is it the same as with the mortgage and I still have to wait 30 years?

I think (hope) you can see the absurdity of the idea that you have to somehow wait for savings to accumulate over some number of years simply because the mortgage was "scheduled" to be paid, but let me know. By that rationale, if I have the cable guy "scheduled" to come tomorrow and I need to "save" some time because something else came up, I have to cancel the appointment and then accumulate the saved time over the course of the next week or month or something. What do you think - cancel the appointment / time saved immediately, right? Maybe you don't like that because it's only a four hour time window (let's be honest - 8 hour). What about instead of the cable guy I decide to become a janitor instead of a doctor and I saved myself 12 years of time in school? When do I get that time back - is it like a 30 year time frame again? 42 years? Can I pass some of the time down to my kids if I pass away before I've gotten it all back?

Obviously, I'm kidding for effect, but super smart people say wacky stuff all the time and if you don't drill them with what they're actually saying sometimes they still can't get it, because they're just that conditioned or whatever. Hopefully, you'll just snap out of it, but it's pretty rare.

Secondly, even if you somehow can't see that what you're saying is wrong, randomly applying the effects of inflation (a dollar is worth more today than in a year) doesn't make sense, either. I don't get a 50% off coupon and think, "Well, what's the use? I could save the money, but inflation is just going to get me in the end, so I might as well just spend more money" or see a great investment and think, "Well, I want to invest, but inflation is going to eat into whatever I gain, so it's not really worth it". Inflation is what it is and it's applied evenly across everything, so there's no place for it in this conversation. Yes, your "investments" should beat inflation if you ever want to make any money - everyone knows this - but other than that inflation doesn't affect anything more or less relative to anything else (house vs car vs college tuition vs a new TV), so there's no reason to account for it in this discussion. Let me know what you think.