Velocity Banking - The Truth about Paying off Your Mortgage Faster
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- čas přidán 3. 08. 2024
- 0:00 Introduction
1:50 The sales pitch from all the guru's out there
3:11 Clips from the original video
7:20 Breaking down the example that is often used to sell velocity banking
21:27 What I think is the best way to pay your mortgage faster
#velocitybanking #heloc #schoolofpersonalfinance #richmccormack
Velocity Banking and paying off your mortgage faster - There are so many channels out there trying to sell you on the velocity banking concept and convincing you that they can teach you and coach you to pay off all your debt in 5-7 years. After running the numbers I can say with certainty that is it just not true.
Using a HELOC can help pay off your mortgage faster, but there are a lot of variables and it requires financial education.
Do not use a credit card at 21% interest to pay chunks at your mortgage.
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To Becoming Great with Money,
Rich McCormack, CFP
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Let's hear from all those people that have used velocity banking to pay off their debt without using any of their own money....
I've been weighing paying down my mortgage vs. investing and I realize that investing over the long term will most likely be a better choice given the low interest rates. However, I wondered if paying down the mortgage initially (given the beginning of the amitorization schedule has the bulk of the interest) makes any sense. Could you let me know if there is a flaw in my understanding of how that works? Might make an interesting video.
For example, would it make sense to pay the mortgage down to reach the year 15 on the amitorization schedule and then switch to investing?
@@marcwilliams4246 hey Marc just seeing this...the video I did this week comparing 15 vs 30 year does touch on this -czcams.com/video/SYxAQAAhJ1w/video.html let me know after you watch that one what you think. The money you use paying it down earlier will still be the equivalent of earning the interest rate on the mortgage. The reason you are paying more interest in the beginning of the loan is because you owe more money then. The interest payment throughout the loan is just math. The outstanding balance x interest rate divided by 12 months. For a $400k loan - 1st payment = $400,000 at 3% /12 months = $1,000 interest. Later on in the loan you owe less money so you owe less interest but the payment is the same so more goes to the principal. So paying more in the beginning is still not better than investing that money instead (making the big assumption that you can earn a higher rate of return on the investment) Sorry if that is confusing...
@@marcwilliams4246 You would still be better off investing as long as you can earn a higher rate of return on the investment vs the interest rate on the mortgage.
School of Personal Finance yeah I kinda realized the flaw after asking. I realized that once I started investing after the 15 years I’d be starting with nothing to accumulate interest on so it would essentially just be delaying everything 15 years and give you pretty much the same result by 30. Thank you for your response. I did watch your other video and it helped me realize that I only want to pay off my mortgage for personal satisfaction reasons but it’s not the most pragmatic thing to do. I’ve decided to pay my mortgage normally and put the difference in a Roth Index fund and maybe some REITs. I’m curious about your thoughts on REITs.
Currently doing velocity banking using a heloc. Started 6 months ago and I've already paid off 38k principal on my mortgage. One major thing you need to understand is you must have positive cash flow for it to work. If you spend more then you make and have bad money habits its not for you.
Thanks Mark!! That’s awesome. You are exactly right cash flow means everything.
But if you were so cash positive to pay off 38k in 6 months you didn’t need a heloc you could have just made lump sum or extra payments
@@chrisdranfield3828 That's true, I could totally do that. However, this strategy has everything to do with increasing cash flow. Every time I make a chunk payment on my mortgage with my Heloc. I increase my cash flow that month because the chunk payment makes the mortgage payment.
After doing the math I estimate I will pay off my house 6 months sooner than just making extra principal payments.
@@marktra8two I would never say 6 months is an insignificant thing, but I would say that it seems like a tremendous amount of work to accomplish this.
@@chrisdranfield3828 You fail to take into account the loss of liquidity with making extra principal payments.
I used a 1st position heloc to pay off my home, then a townhouse, and then a 200k property. It absolutely works if you have the cash flow and live below your means.
Lmao, then you don't need velocity banking.
@@cryptojihadi265 Exactly..just send extra payment to your mortgage company between teh ammortization cycles. Then this goes DIRECTLY to the principal.
We paid off our house with a HELOC 2.74% interest rate. We then use a credit card to pay all our bills. We have traveled free on points. 80k took us 11 months to pay off. Velocity banking worked great for us. Only issue is you have to be disciplined to pay credit card before interest is accrued. We are now looking to buy our second house via velocity banking.
Wow so you have around $7,200 in cash flow a month ??
Sure you did.
Your said you used a HELOC but then said pay your CC before the payment is due. I think you don't understand numbers and interest (daily or monthly).
Who did you follow? Or any books you can suggest please me and my husband are trying the same
@@user-fr9ns7mh6f I put all the monthly expenses I could on a paid off credit card. I always paid it off before the due date eliminating any interest. In this way I was able to postpone (get an interest free loan) every month's expenses and pay them off before the payment due date. Depending on when I charged an item I would get up to 41 days of interest free use of the money.
I was intentionally always running short on money. Every spare penny I came up with I paid to minimize the balance on my mortgage. I sold a lot of stuff that I was no longer using. Craigslist and Facebook marketplace are your friend. Do all of your spending on Credit Cards that pay points or airline miles if possible. Always pay off your credit cards in full every month.
Never charge on a Credit Card that you did not pay off in full last month. Only charge on a credit card that was fully paid for last month. That way you get both float and grace period on your monthly spending.
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One thing your forgetting is if you pay off the credit card for your bills before 28 days you won’t have to pay the interest on the card.
That only works if you're paying off the credit card IN FULL each month. In the example given by these velocity banking gurus, the LOC always maintains a balance, therefore it is accruing interest.
I do this monthly, so velocity banking seems like robbing peter to pay paul
@Tamarocker88 in this example, the CC or LOC already started with a balance. So you're at the pay down portion of the steps.
There's no daily interest accruing for the debt that's been paid with 5k and the expenses don't get added all at once.
It’s still less interest than a mortgage
What’s the point of doing that though? Why not just take that money you would pay off your CC with and apply that to the mortgage? The banks and credit card companies thrive off of people who say “I’ll pay it off every month.”
We paid our 400k house in 8 years using HELOC. So I think it worked great.
Congrats that is awesome!!
It works for me as well.
Nice!
It’s working for me!!
Wow .Good job
Explained very well. It scould have helped me a lot if the title had been--"don't us credit cards for velocity banking--us a HELOC."
...smh click bait.
Also, USE an "e"
Well said. Clickbait title and clickbait thumbnail. Only use a HELOC that can operate *exactly* like a checking account.
The reason I used a line of credit instead of paying the extra money towards the loan is that when the line of credit is paid off, I can use the line of credit again and again. That gave me a sense of security in case life happened and I needed to use funds to pay any emergencies.
That is why you need an emergency fund set aside
@@alexlee6129 or a simple credit card for emergencies.
@@alexlee6129 If you put the money you would have in your emergency fund to pay down your HELOC you can borrow it back any time. Or you can use a paid off credit card to pay for emergencies.
Velocity banking worked everytime I have ever used it. All it is requires is disciple. I am completely debt free because of it.
@@alexlee6129 Oh goodie! Hope Santa brings me one of those for Christmas! 😃
I think one thing that is overlooked in this video is nonmonthly, expenses that most people save up for as cash in their checking accounts. I have $x saved up in case of an auto repair, $x saved up to use during christmass, same for insurance premiums, medical/doctor visits, vet visits, home repair funds, clothing funds, ect. The advantage of VB in my opinion is all of that cash rather than sitting in your bank account is now being used to pay down your debts and is still available if/when you need it.
Yes.
...at 21% interest
@@AndrewgSpeedruns - if you're placing that money from rainy day accts on your credit card, your interest payment goes down every single month. That's much better than it sitting there in an account making 0.25%. Put it on the card and it's used to lower interest payments and improve credit score. If you need it, there it is...doing double duty.
I mean, is it? If its sitting in your fully paid HELOC its doing exactly the same thing as if it were in your bank account and if you then put all that money toward your mortgage once you've paid the HELOC off, then you now no longer have that emergency money until you come up with the full amount of the HELOC to pay off. Its the same thing. If you want the money to be available for emergencies it can't be used to pay down your debts, if you want money to pay down your debts you have to take the money from what's sitting around or open some credit. It really makes no difference.
@@michaelrudolph7003Heloc the bank can spike your interest rate at any time, so you absorb a lot of risk.
Those extra emergency funds in the other comment, put in a HYS account.
I ran the numbers a few weeks ago, it's a lot of work for minimal savings. If you got locked in a Heloc at a lower interest rate, why not refinance at no cost (sell points). Process would save us around 200 a year. Not hating on velocity banking and it works for some people, but it's a lot of work for minimal savings vs just putting that extra money to principal at the end of the month paying out from a HYS or HYC.
Dont get a car loan to begin with, you are paying interest on a losing asset, double whammy.
Yes, he is right about reducing the length of your mortgage by making extra payments, but the CRUCIAL thing that he has missed is that you don't have to get a different, or additional job to make that additional payment.
You use velocity banking to create the required cash flow to accelerate payments with minimal additional work.
That's the difference.
So VB creates free money?
If I understand this correctly, this guy is missing one point. It is that when you put all your available income on your HELOC or PLOC or CC, you will use that 'tool' to pay for your regular expenses. However, those expenses don't come out all at once. Therefore, you are saving on your interest since interest is calculated on average daily balance. So if you pay one bill at the beginning of the month, one in the middle and one at the end, it won't be as expensive for you compared to if you paid all those up front.
@@kristinshaw7497 True. But for the average person who lives paycheck to paycheck, the amount you can "park" (and therefore the interest saved) is trivial. Assuming a smooth flow of bills, it would be the interest on half of one paycheck. Usually negated by a higher interest rate on the LOC.
@SchnabelMcSchnabel this isn't for people living paycheck to paycheck.
@@kristinshaw7497 He covered this point, you clearly didn't watch the video. When you calculate the daily interest as the balance climbs back up from the lowest point to the highest point as you pay your bills over the course of the billing period, the amount of money you save in interest by using velocity banking over just using the extra cash flow from savings is MINIMAL. The common velocity banking example given by those who promote the concept makes the bad assumption that you DON'T pay any bills over the course of the month. They then make the bad assumption that you make a lump payment to the LOC at the beginning of the cycle, and then for the entirety of the cycle interest is accrued at that lower balance, then all bills and expenses are paid on the last day of the cycle. And this is completely ignoring the interest you're being charged on the LOC because you're maintaining a balance!!!!
$400k @3.5% mortgage gone in 6.5-years. We were very fortunate to have excellent paying jobs. Our $1,800 mortgage payment was bumped each year by 15%, and we lump sum payed +5% ($20k) on every anniversary date. Now, this took on average, an extra $2,000 each month in the second year, and $5,000 extra per month in the last year. Total payout was $450k. No HELOC, no CC's used. Excess payments direct to principle only.
That is great Mike!! That’s how you do it!
That's great! Congrats! However, a lot of your capital was tied up. Those who really know how to do velocity banking correctly will know what i'm talking about.
@@Sci-Fi_Fan296individuals don't and shouldn't care about cashflow. that's a business concept. each person has their own financial path. cashflow isn't as necessary. Building assets is more important
Awesome job
It is AMAZING that your house is paid off, but you lost the ability to use your equity. Now, you have a paid-off house with locked-in equity, which means you paid interest the other way, in lost opportunity cost. That is not a good deal.
Great video BUT the part your missing is this: by NOT using a credit card or HELOC, taking that extra $2k (after your bills are paid) to make a principal payment towards your mortgage. But now you have nothing left over, you are all out of resources. If you have an emergency, your screwed. By using a HELOC, your whole check goes into it, pay your bills and what’s left over goes towards the balance of the HELOC. If you have an emergency, you can always pull out funds because you’ve paid into it and whatever is left is paid towards the balance. That’s the way I used a HELOC and it’s a wonderful thing.
Jose Collazo thanks for your comment. I agree with what your saying...I also use a HELOC but the point is you are only saving a little bit of interest during that time that your “unused” cash is sitting in the HELOC. It’s not going to be the thing that is responsible for paying off a huge mortgage in 5-7 years. having the additional cash flow to pay off the balance is what will do it.
You can have a line of credit or credit card just sit with a 0 balance in case of an emergency. It’s the same thing.
I have 20k emergency fund. I don’t care about inflation because the mortgage payment will not change. I understand homeowners and taxes change but the interest is on the mortgage only.
VB does work. I paid off all my debt except my home using VB. What I think is missing here is using the LOC to acquire income producing assets. I used my HELOC to put 20% down on 2 rental houses last year. They produce $3000 gross income, $1500 net per month. When my HElOC is paid down, I will buy another rental. Using this strategy, for me, is about producing streams of income.
Agreed! I also used a HELOC to buy rentals.
I was JUST recently told about doing this with cash-out refinancing. I should NEVER have refinanced for any other reason than lowered rate or a down payment on a rental property. I paid out soooo much in interest over the last 6 years.
That’s fabulous!
So you invested, you didn’t do velocity banking.
Bravo. I teach the Infinite Banking Concept and we use Velocity Banking to pay off all debt in 9 years or less. I don’t think I’ve ever heard anyone explain this that well. Great content.
Loved the video! I have always known this about "velocity banking". Those who understand interest, earn it. Those who don't, pay it. It is clear who understands and who doesn't.
To understand this you need to create an amortization chart and look at the numbers. When you make a large payment in January you are cutting into the principal immediately in January and every other payment now has more going to principal. If you create an amortization schedule you can see how each option works..and trust making large payments versus extra each months kills the mortgage faster
Wow, so they calculate _all_ of your interest based on _one_ month?!?
Interesting...I've never heard this, but it's worth looking into.
A great amortization calculator will also tell you how much interest you will be saving during the life of the mortgage something he didn't talk about.
This is not telling the whole story.
Yes, your mortgage in a vacuum will pay less by making 1 big payment vs say 12 months of extra payments.
But you are ignoring the NEW amortization schedule for your LOC loan. That doesn’t just magically go away. The LOC has to get paid off too.
The most obvious example is to take it to the extreme. If you had a $100k mortgage, you could do a $10k LOC and pay down a big chunk. OR you could do a $100k LOC and pay the whole thing off! And that would indeed pay down the amortization schedule and save all the interest on your mortgage. That is true.
But you now owe $100k on a LOC too. Typically at a higher interest rate. What’s the schedule on paying that one off? Are you factoring that in?
A $10k chunk does the same thing just on a smaller scale
If you have a big chunk of money to start with just make a bigger down payment and no extra effort is required.
I think the major thing you seem to have left out here is one of the biggest selling points of velocity banking: it’s revolving. When you make extra payments on your mortgage that money is locked into your mortgage payment and it ain’t coming out. With a line of credit, that is revolving and after you make those payments you can pull it back out if needed, not only as an emergency fund button, but also to either repeat the process and pay off more debt, or buy assets. As far as I’m aware this is one of the biggest selling points of velocity banking over making extra payments. Also if you have a cash back credit card, which you really should be using for this, it gets that much better.
I know this is super old and I don’t want to speak ill of VB, but I just wanted to point out that the HELOC is still an option in the extra payment scenario if you need/want cash, actually the only time you don’t have it as an option is when you’re in repayment on one already, and once you use the cash from the HELOC say on the mortgage for example, that money is equally locked in once it’s committed. Also reducing the principle balance makes that amount available in a HELOC, so you could pull it out if need as a loan, same as if you paid it from another HELOC. The difference in interest rate calculations may give VB a benefit, but the revolving nature doesn’t seem to be more flexible
@@tk.gaines velocity banking suggests HELOC (if you own a home) or credit card if you don't, or can't qualify for HELOC.
Why couldn't you just open a HELOC if needed if that same issue came up and you needed funds if you weren't using VB?
@@michaelrudolph7003 idk
Yes I’m so confused and still don’t understand how to use HELOC to pay off bills. I do understand the snowball effect to pay down debt but not HELOC.
I'm a loan officer and the idea of leveraging money to pay down your mortgage comes up a lot. If you look at two amortization schedules side by side. One paying 13k every 6 months and another paying 2k per month they are almost identical. However the 13k method also charges interest which needs to be factored. Another aspect is what having high credit card balances does to your credit. Not to mention if anything happens to your financial situation you could be putting yourself in a vulnerable position. I know he said most of this in the video I just wanted to say I agree with his points.
I understand that as a loan officer you would say those things as your training and livelihood depends on people getting mortgages and refinancing when rates drop. It called chasing rates. Closing costs on a new mortgage cans be 5-7000! I have been studying a hybrid concept that involves parts of velocity banking along with parts from other concepts and implemented it this summer. I am in the process of putting together a progress report. Would you be interested in reading it when I’m done?
@@kennycharles6041 Both loans have closing costs. Also, in the example given by this video neither one does a refinance so I’m not sure what you’re referring to.
@@MyProjectWeekend I got a first position HELOC to pay off my mortgage ($156000) in late June of this year. My only closing cost was a recording fee with the county of $14.
2.64% guaranteed for 1year
@@kennycharles6041 who gave u a.1st lein heloc
Great explanation. I needed this. I used my Heloc to get rid of 28K in debt and 21K on my car. I also started put my money in my whole life insurance and paid back the Heloc
I’ve been in my house for 5 years and 6 months. I started implementing velocity banking 6 months ago. I’ve paid down the same amount of principle on my mortgage over the past 6 months using velocity bank as I did in the 1st 5 years of my mortgage making my regular payments. Velocity banking totally works and we haven’t had to change our lifestyle. I should have my $255,000 mortgage paid off in 58 more months, so 64 months of doing velocity banking.
Tell me more...the money has to come from somewhere so something had to have changed. Getting more focused and paying off your debt is awesome. My point is that velocity banking does not save you real money. It might help you become more focused and financially educated which is great but explain to me how it saved you money.
@@SchoolofPersonalFinance I used a heloc to advance down my amortization schedule on my 1st mortgage. I refinanced my 1st mortgage in April for $255,800 at 3.125% on a 20 year fixed. I have a $40,000 heloc at 3.75%. I advanced $30,000 from my heloc to chunk down my principle on my 1st mortgage, so i owed $225,800 on my 1st mortgage. If I didn’t chunk the $30,000 from my heloc then I would of paid $666 in interest and $768 in principle for my first payment, but since I advanced the $30,000 my first payment on my 1st mortgage had $590 go towards interest and $844 go towards principle, so I already had a $77 interest savings right there, but more importantly I was able to skip 37 months of interest payments along the way because i immediate started at payment 37 of the amortization schedule saving $22,000 in interest! Now the cost of that is the interest that I will pay on the $30,000 heloc balance which is $92 per month and that’s if I don’t pay down the balance of the heloc at all, but I have my entire pay check go towards that $30,000 every week and I pay all my bills from the heloc. It should take me 12 months to pay off the heloc and then I’ll chunk $30,000 again. So like I said, just my 1st chunk alone saved me $22,000 in interest and the cost is $92 a month at worse case scenario, so let’s say it takes me a year to pay off the heloc. I will pay like $600 in interest to do it. So would you rather pay $22,000 in interest over 37 months or $600 in 12 months? Either path you chose you will be at a $225,800 balance on the 1st mortgage. I’ve been in finance for 16 years and when this was introduced to me it took me a few months to truly understand it. I stopped trying to explain it to people because they look at me like I’m Doc Brown from Back to the future looking for a flex compositor. It works!
It basically comes down to how the interest is calculated on amortizated debt vs simple interest
Don you sound like a smart dude...let's take a step back and break this down because it is confusing and I have seriously had this same exact conversation 100 times already. I know it is going to be hard to convince you because you already bought in 100% but I am going to try anyway. Just to be clear, obviously I believe what you are doing is better than not doing anything at all so I am not going to compare it to doing nothing. My argument is that what you are doing is no better than just making additional principal payments each month and that this whole velocity banking lingo you are throwing around is smoke and mirrors. Hopefully you did not pay someone thousands of dollars to "coach" you how to do this and hopefully you are not charging anyone to coach them. Here we go:
1. If you owe $225,000 on your 1st mortgage at 3.125% and $30,000 on a HELOC at 3.75% it costs you more interest each month. $682 in month 1 compared to $666 if you just left the mortgage alone. So you are not saving $77 in interest...it is costing you $16 in interest. This is common sense considering you are moving $30k from $3.125 to 3.75%. The fact that one is amortized and the other is simple has absolutely nothing to do with it. It is math.
2. Yes...you save interest by parking your paycheck in your HELOC before sending it out to pay bills. This is where simple interest comes into play because you can reduce your daily balance. Maybe this saves you at most about $10 a month depending on the amount of your paycheck and how long it sits before you send it out. But remember you are paying $16 more interest just by having the $30k balance on the HELOC to begin with. So you are still not breaking even.
3. You are paying the heloc down with the excess cash flow from your paycheck but if we are comparing apples to apples with you just making additional principal payments (not doing velocity banking) then you would also be using that excess cash flow left over to pay down the mortgage each month. To show you all the true exact numbers I need to know what that cash flow amount is that you are leaving in the heloc every month to pay the balance down. Let's make the assumption that it is $2,500 because you said it will take you 12 months to pay off the $30k. But this doesn’t account for any interest expense on the HELOC.
4. Let's go to compare where we are at after payment 37 because you used that as your starting point. Your principal at that point is $192,958 while mine is finally close to where you started at $225,988. But here is what you left out...you still owe the money on the HELOC...if we are comparing apples to apples than any money you pay towards the HELOC I would be using to pay down the mortgage. Since we are not comparing me using that difference towards the mortgage then it is not correct that you use any additonal funds to pay down the HELOC...including the interest cost. So if we compare the mathematically correct way then you would owe $33,468 on the HELOC. ($30k @ 3.75% for 37 months) Your total debt at this point is $226,426 while mine is $225,988. If you want to argue that you would be paying the HELOC off then I should be able to use that same amount to pay off my mortgage balance.
5. Let's instead look at 12 months out when you pay off the HELOC compared to me paying the extra $2,500 a month to principal each month. At the end of 12 months you will owe $215,573 and ready to chunk again in month 13. At the end of 12 months I will owe $216,010. The reason your balance is less is because there is no way to calculate the interest that you owe throughout the 12 months on the HELOC considering you are parking your paycheck for a portion of the month . I used 0% interest in this example to give you the benefit of the doubt...but in reality there would be an interest cost to using the heloc that needs to be accounted for.
6. Let's look out 24 months after you have chunked twice. At the end of 24 months your remaining mortgage balance is $174,071. Again...this is assuming 0% interest on your HELOC because it is impossible to calculate. So you are paying it down by $2,500 a month over 24 months which is the $60,000. Compared to me just making additional principal payments of $2,500 a month for 24 months my balance is $174,959.
We can keep on going all the way through the loan...hopefully this was easy to follow along. The truth is you are not saving $22k right out the gate by moving $30k over from a HELOC to pay down the mortgage. This would be true if you never had to pay the heloc back...but you do and if we compare apples to apples while you are paying back that $30k I can use that money to pay down my mortgage and we are going to end up in the same place. The only difference is the interest rate. If you could get a heloc with a lower rate than the mortgage then you can save some interest but it will not result in you saving hundreds of thousands of dollars like all these velocity banking advocates claim. Would love to hear your thoughts.
@@SchoolofPersonalFinance it’s clear you don’t understand and the fact that you claim to had this exact same conversation with a 100 other people shows that you will never understand. All the best to you.
Thank you for making sense of this!!! No smoke, no mirrors - thank you ☺️
Great Video! I like how you broke down both sides to get real numbers. I have used velocity banking in the past to help pay off my mortgage and thought it was a great thing. This however, makes total sense.
Thanks Dave!!
Excellent presentation. I appreciate that you show the evidence as you speak. Nobody has expired this concept better than you.
Thanks 🙏
Thanks for the breakdown. I've been doing velocity banking for a few years now and have paid over 100k in debt, but you make a good point. I guess it's just a psychological thing..😆
Thank you for explaining it. I knew it sounded too good to be true. Yes the best way is to stop spending where you don't need it. And give 10% to charity then you know you are blessing people even while you have a roof over your head and your needs meet. Also what they are not accounting for in velocity is that most people have like 5 or 6 credit cards and they are at their Max. They have no money for saving and they use their credit cards to buy groceries, gas , their phone bill, car bills like oil change, when your things break like a dryer etc all goes on charge cards sadly when you are In a tough spot
Giving 10% to charity is hurting yourself if you're maxed on 6 credit cards. Pay off the cards first, pay off your bills, then be generous with your surplus.
Be careful what you donate. Most charities are scams.
Thank you so much for breaking this down because I wasn’t seeing how velocity banking really worked. It was seeming like a lot of work and juggling just to save some money on cc bills and pay them off faster but I couldn’t see the matrix of it all.
I really needed this!
If that is all you got from this, he failed in his attempt to explain velocity banking.
Basically Velocity banking is taking your credit card payment and making it positive cash flow because your income going into your credit card satisfied that payment. So instead of putting your money into a checking account and paying our bills, including cc bills. You are placing your income onto your cc which will satisfy your payment, lessen your interest a little bit every month, and boost your credit score because your utilization goes down every month.
@@hnybjonez2961yea but your monthly expenses still goes on the CC and the cc monthly payment is still do which doesn’t make sense
@@hnybjonez2961. I appreciate this info but I still don’t understand VB concept! Is there a VB book for dummies? I can’t get my husband on board until I fully understand 😴
Loved he breakdown and the interest calculated! Instead of just seeing mortgage, you stepped back and showed the big picture! Thank you
Thanks!
You are the first person I've watched on this topic that actually makes any sense. Thank you! This whole velocity banking sounded like a shell game to me, and now I know it actually is.
Not if you put ALL your monthly income toward paying down the HELOC, and use the HELOC as your expense account, it's not maxed out and you're not paying full interest like his example, you're not accruing daily interest on a 12K loan, it's slowly building up toward the 12K as you use it for expenses. But then put all your income in there again...see?
@@mattedj It only works if your HELOC has a lower interest rate than your other bills. Right now HELOC rates are terrible. Still a shell game IMO. That said, we have zero debt so it's not something I would do anyway.
It does work...if you work it correctly.
@@Momo-SixTimes - even a 23% credit card is better than a mortgage...when it comes to paying down your debt/mortgage. Good thing you don't have debt....
I’ve pondered offering this advice to those in crisis but it requires discipline, often not the trait of those that max out CCs
19:37 The something that you're missing is when people open up to the strategy of using debt weapons, their spending habits change automatically so they will happily spend less. The way that they look at money over all changes, and the mere excitement of learning a fresh idea that works is enough to maintain an interest in budgeting and debt management.
💯 I don't plan on doing anything like velocity banking (interesting to learn the idea or concept), but my spending habits changed within a month or two of using a credit card daily. I established what my weekly spend is allowed to be and shoot for a little lower.
With debit, it was easy to see a bunch of cash in my checking account and be like, "meh, I got the cash."
Thats all fluff...not data. But yes....if this is what someone needs to change their spending habits then that a good thing.
Statistically speaking, you're a 12 percenter; good for you 👌
The other 88 end up reset for more debt.
Yup, that's the ticket. Its easier to change the behaviors. I teach Dave Ramsey, both are saying "weaponize every dollar against debt" but velocity makes it easier because the behavior change is easier.
Do you recommend doing a " re cast on your loan ?
Velocity banking worked great for me, even with an non-home equity LOC. Interest rate on it is currently 12.5% but, I was able to rid myself of over $75k in consumer debt after settling my divorce. It took a little over 2 years, but now I'm consumer debt free and currently starting to eliminate the principle on my mortgage. Pouring my salary directly into my LOC was a game changer for me.
What works is replacing high interest debt with lower interest debt AND paying extra every month. Replacing low interest debt (mortgage) with a 12.5% loan would be silly and certainly not cost effective
@@thomasxxxxxx2345you don't understand interest debt. Lower rate amortized interest on mortgage is way more costly than simple interest on a higher rate LOC. You need to understand this first to understand how velocity banking does make sense.
@@thomasxxxxxx2345 A 12.5% LOC is not the same as mortgage or card loans. Mortgage is amortized and LOC is not. You'd be front loading on principle to reduce the amount of interest taken each month on your mortgage payments, then using the LOC as a checking account. The LOC should not remain at max credit, there needs to be a positive cashflow over time or it will not work.
Where were you able to get the LOC? Having trouble finding banks which offer it. They keep trying to get me to take a loan.
I need help on this. My mortgage rate is 4.5% and a personal line of credit would be a higher rate than that. Is it still cheaper to get a PLOC and start paying off my mortgage in large chunks with that PLOC?
I did this on my personal residence with a heloc and I'm down to 15% LTV in 3 years. Here (Canada) helocs are capped at 65%, so no point paying down mortgage anymore. Now all my income from rental properties, private lending, and my primary income savings go into my heloc and gets reinvested on repeat. Working great and opens up an extra 9k or so every month on the heloc. And all tax deductible interest. Gotta love it.
Amazing job man
What is tax deductible here in Canada?
Paying interest in the HELOC vs by paying it down and the borrowing from it to reinvest makes no sense. assuming 9% HELOC rate, you are borrowing at 9% and would have to reliably and steadily get more than 9% to make any profit. Payoff the HELOC asap, and then reinvest your cash as you get chunks of it. Use the HELOC for big ticket items like needing to replace a roof or AC system in your rental, then pay off as soon as you can.
Finally, someone who is helpfull without any of the bs! Sadly I was never really taught finances growing up, so I need things broken down as small as possible to understand. Thank you for this!
Me too!
You’re right but also disregarding:
There are three buckets, the mortgage, the savings account, and the credit line.
If you drop into the savings account you can pull back out as cash. If you drop into the credit line you can pull back out as “cash” (ideally using HELOC). If you drop into a mortgage it’s stuck there without significant work to get it out. This makes a big difference cause you can pay off large balances with quantities you’d normally need as a “cash reserve”. Great video and much more clear break down than others.
Finally, some sound reasoning. There's a ton of CZcams charlatans that suggest borrowing against a 21% credit card to pay off a 3.5% car loan. If you don't understand, seek someone out that can quickly throw together an Excel amortization chart. Just because it's on CZcams, doesn't mean it's true or accudate. Nice job on this video. Keep it real.
This year I got hit by the pandemic’s economic effects and got my work hours reduced but in less than 4 years I plan to be a self made millionaire. No longer will I update my resume. Now I am working on a business plan!!
I think this pandemic has taught people the importance of multiple streams of income, unfortunately having a job doesn't mean financial security. i really appreciate the transparency and giving people a fighting chance during this troubling times.
It’s essential to build multiple streams of income especially in this period of the COVID-19 pandemic, truth is COVID shouldn’t even be the reason you want multiple streams of income in the first place. Think about an investment that makes you money even while you sleep.
@@botejoey5056 You are correct! Multiple streams of income is similar to diversifying your investment portfolio!! Thank you for your encouragement!! 😎
what kind of investment are you into and how do you suggest I start?@ bote Joey I ve been meaning to diversify my stream of income but have been scared to loose money.
@@financeabcs yea I know right
You explained this so well. Showing true number comparisons.... I've watched several velocity banking videos & it sounded great but I just felt like something was missing , just wasn't convinced. With ur video it finally clicked & I now understand. So thank you for saving me the trouble of having to find out the hard way that its not better to be using that credit card.....
THANK YOU! Thank you, thank you! I’ve watched numerous videos on velocity banking and it’s absolutely amazing how anyone found this to work in any way shape or form. And, we are in a rising interest rate environment so it won’t work even worse as rates rise. Half the time the posters are pushing the numbers to suit their purpose.
Exactly
It is quite apparent that neither of you understand velocity banking. But hey you do you
@@TheToomdog you only pay off anything as quickly as you pay down the principal. If you need to play mental games to pay off your debts, go for it.
You have no idea how many of my questions you answered in this video. thanks!
Thanks Wyatt!
You get it. All people are doing is making debt disappear from one pile but ignoring the debt that adds up more in the other pile.
Except the debt in the heloc pile is cheaper debt
Thrilled I stumbled on your channel! This is one of the best explained videos on this topic! You’ve just earned yourself a new subscriber, thank u! 👏🙌
I have used VB to pay off 2 mortgages. It worked great for me, but you have to be careful if not done correctly you can mess up your finances worse.
I think it becomes dangerous when people don’t have a cash flow from doing it and they don’t do the math.
Did you do it exactly the way the VB advocates explain it in their videos, paying chunks out of a heloc? Just curious, thank you.
Good breakdown of this and best counter argument to using credit cards to do this. I find a few videos on this really gloss over it and omit the true cost of doing the alternative methods.
Personally, I pay extra on my mortgage each month and don’t utilize a heloc. I avoid annual fees and paying any interest on the heloc. Since rates have risen, those Helocs are now likely more expensive than your 30 year mortgage if you’ve had it for a couple years or more. I think it does make sense to use the heloc when it is lower than your mortgage.
Thanks for a really good video!
If you look at someone break it all down for you, you'll see the difference from using a HELOC or credit card versus the mortgage. And you refinancing for cash out....a bank's wet dream.
Getting out of debt is not about knowledge, its about discipline and goal setting. My advice is scale down your lifestyle so you can afford a 15 year fixed at a lower interest rate compared to a 30 year. Its not hard to spend 220 bucks less per paycheck. Keep an emergency fund handy. My 15 year is on autopilot saving me money at 2.25%. I don't have any debt except mortgage and it feels great!
It is about knowledge AND discipline. Using velocity banking (depending on your cash flow), you can save $220 a month without changing your lifestyle. Depending on the bank you use, you can put everything on autopilot, just like I do, and get a better result without eating beans and rice every night and telling your kids they cannot go to Disneyland.
Thanks for this. I randomly got recommended a velocity banking video and watched a few to see what it was. I was pretty sure most of them didn't understand how interest and amortization work. Your take is essentially the same as mine.
The one nugget of truth I see in these claims is that people who have high interest credit card debt should pay it down as soon as they get paid even if they'll need to rack most of the debt back up to cover expenses, because at least you save interest on the balance reduction in the interim. With some cards at 20%+ that can be a lot!
And yes, you can pay down your credit cards more than once a month. I personally do it weekly right now to keep a close eye on spending.
You said all of that only to end with “your” plan which is velocity banking with a HELOC parking strategy.
I know.🤣
Thanks for exposing this. I am a numbers guy and I could see the stupidity of the velocity stuff right through. It makes a very small difference not like what they claim.
Truly wish I had this knowledge younger. Still thankful to finally understand. I won't get as far as I wanted but I will be further along than I had been heading.
Velocity banking got me out of debt faster than I could have believed.
Like others have said, it works beautifully if you have an LOC, a positive cash flow, and the ability to stick to a strict budget.
It is an interesting concept that really worked for me.
Thank you very much. My wife and I are in the middle of refinancing and she heard about velocity banking and now wants to put the entire mortgage in a Heloc because she's convinced it will save tons and tons of money. We are both intelligent people and just wanted to get a handle on what the savings are and where it comes from. I think we will end up going with the strategy you mentioned at the end. It makes sense. Thank you. we are both better informed now.
Thanks Robert. With interest rates still so low and HELOC’s being adjustable I would caution you against putting the entire mortgage on a HELOC. It definitely depends on your situation and how big the mortgage is but a 30 year loan locked in at 3.25 sounds pretty good to me!!
@@SchoolofPersonalFinance We are looking at refinancing into a 20 year at 2.9%. I think we will get a heloc too since they are offered with no closing costs as long as you keep them open for 3 years. We have other investments and I really don't like the idea of going all in with the velocity banking system. To see any real savings from it would require not using the money we would normally invest in stocks and bonds and dumping that into the heloc but then we would lose interest from investments to save interest from loans and that doesn't make much sense to me. If we get the heloc we will probably just reduce our cash emergency fund by about half and not make any other really radical changes. At least that's what I'm leaning towards right now. Refinancing everything into a heloc makes me very nervous because if intrest rate changes later I don't want to be backed into a corner 5 years from now. I'm not sure I like the concept.
Yeah that’s exactly how I felt and I did what you are leaning towards.
would doing one month chunks accomplish the same as 6 month chunks?
@@SchoolofPersonalFinance interest rates aren't low and Heloc r fixed interest rates
I keep rewatching this video
You are making perfect sense. Thank you. I was confused by that velocity banking. They speak with such confidence, but it doesn't make sense mathematically. Thank you for clearing it out
Thanks Olga!! 👍
Thanks for the video. I just found someone on CZcams touting "velocity banking" and could tell it was a scam upon the first explanation (or at least very sub-optimal). If you want to pay down debt, just pay down debt by making extra payments (make sure they apply extra mortgage payments to principal as some banks have deliberately not applied the payment correctly at times). No additional loans of any kind are ever necessary to get out of debt. Another problem with velocity banking is the pitch is you can just spend the way you have been spending, however, usually the problem is spending is out of control and should be reduced so there is more free cash flow to pay down debts.
A good simple rule for mortgages is to try to triple up the starting principal amount. In your example that starting principal amount was $432, so if you have the cash flow then add $864 on top of the regular payment (making sure it goes toward principal) and keep doing this each month. You will knock years off your mortgage doing this. You can figure out what level of prepayment will do to the length of the mortgage for other amounts, but this is a good "rule of thumb" for a starting position. One last caveat, never pay anyone to help or advise you on how to accelerate paying a mortgage or any other loan. There are people trying to sell a service to do this and you can get it all for free without paying anyone. Educate yourself if you have to, but don't pay anyone.
So the method for me is similar to what you said. Chunk the mortgage out of the HELOC. Use CC for monthly expenses and pay it off every month. All of our income goes into the HELOC 1st though. So far it works great and we are racking up rewards on the CC which we dump back into the CC payment too. It def. keeps us focused on the goal which is to pay off the mortgage.
I do this as well. My opinion it is the best way to go for all the reasons you just said. 👍
When u say “chunk” the mortgage...did you first use the heloc total, say 12k to apply to your mortgage first?
@@SchoolofPersonalFinance how are you "chunking" in advance without the leverage? You sound like you are just paying extra principal each month. That does not have the same effect. Build a thorough amortization schedule with a side-by-side variance, then use real world numbers (not estimates) and you will see the mathematics. Plus, the HELOC method doesn't restrict access to that equity if/when it is needed.
Velocity works! The correct way is to get either a HELOC or personal line of credit that is linked to your checking account with free overdraft protection. Once the cash flow comes in, push it into the HELOC or personal line of credit. All bills get paid via an offset CC (the ones that allow it) and pay the full balance on it the last of the month. Do that math over and you will see it works
I am using a hybrid concept and it has simplified my finances significantly plus is reducing my debt much more quickly than any method I’ve seen before! Want to know more?
Just stumbled across this strategy of velocity banking and my very first question was whether it’s better than just putting those extra payments towards your monthly mortgage. It was incredibly difficult to find an answer anywhere short of just doing the calculations myself, so thank you for outlining it all!
Just did a new video. I’m gonna continue calling these people out. Velocity Banking is a Marketing Gimmick
czcams.com/video/kjpqYLuftXY/video.html
Based on your slide with velocity banking over 4 years the interest is $8800 and the mortgage interest is $45,000, so it makes perfect sense to use velocity banking. The concept is to use somebody else’s money not to “try to” come up with your own chunks.
Excellent video. I have come to all the same conclusions. Very well articulated. I "want" velocity banking to be the miracle that everyone is promoting, but the reality is, it isn't.
I don’t think anyone called it a miracle. It’s just a system of accountability that’s saves small amounts all the time and you reinvest the small gains continuously to save more and more compounding money.
@@obenwahkenobib8899 Duly noted. Unfortunately I have run the numbers and it doesn't actually benefit any more than pre-paying the mortgage early. And the "miracle" idea I was referring to is the idea that many people are promoting online that people can pay off their mortgage within 5 to 7 years without increasing their payments just by using this method, simply isn't true. It's not even possible. Even if 0% interest was charged, the principle is too great to pay off within that timeframe without substantially increasing the payment.
Truth!
Been out of debt for years it's a great feeling. I have watch several velocity banking videos and never really understood them. This video was very well laid out.
I love how Your toys in the background evolves over time😊
And Your breakdown of a very important issue is very high quality!.
lol Thanks!
Playing the credit game in debt based system. Live within your means still is true. Thanks for sharing
Velocity banking definitely works!! I’ve been using these techniques since the 90’s. Agreed! using high interest card is silly Thomas. I use a personal line of credit to attack my other higher interest. I never use a credit card except for monthly bills. And that’s paid off every month.
Paying extra money to existing loans allows to reimburse them faster. But using a CC to do so is silly and just costs more money
@@thomasxxxxxx2345
Agreed, I only use my credit card to pay monthly bills and pay them off every month. I always put my focus on paying the lowest amount of interest as possible.
He switches between cc and a loc. cc would not be the best because of the difficulty in paying the mortgage
I like velocity banking so, i watched your vid until the end and good thing i didnt judge before watching. - and yes, i agree CC not a good idea, HELOC is what i used as well to payoff over 30k in 6months and even now with 6% prime still lower than many of credit cards out there.
Ha, thanks for confirming my math with this breakdown. I have watched 40+ videos of paying off/down your mortgage with a HELOC. I have created multiple spreadsheets and started thinking everyone else sees something I didn't. The math doesn't work out for me either. If you have the extra $2K a month, just put it on the mortgage. One could always get a HELOC and use where needed, but the mortgage is not the right move
I watched one video on velocity banking. Eyeballed it and figured you’d be in the same ball park just sticking extra money directly on principal with a lot less trouble.
Appreciate your painstaking detailed number crunching to save me the headache to make sure I eyeballed it right.
Thanks again for a great video. I’m obsessed with paying my mortgage off before I retire and we make bi weekly payments plus an additional $800 a month towards principal. You gave me the idea of making additional principal payments by calling it in every month using my credit card, if they allow it, and paying off the credit card at the end of the month to get the points.
Thanks Diane!!
Great video, it reminds me 8 months ago, when I was so poor and broke that I could barely afford a meal a day. I remember that I had to take the biggest step in my life when I invested my last income with a specialist trader who works with a Forex trading company. It may seem little, but it took courage to know that investing was the right thing to do at that moment. Today, my small investment of just $ 1000 raised more than $ 150,000. Honestly, to succeed, you need to take a big step. That's where it all starts. Forex is also a good investment.
@@annaalessandro376 Honestly, I'm really excited about that. Great success can be achieved through investments. I am a great example.
@@annaalessandro376 Hi Anna, I'm really motivated by your story. But I'd love to know if you could give me any information on how I could reach the professional forex trader you worked with?
@@annaalessandro376 I had interest in forex but I was discouraged after I lost over $11,000 doing that on my own😔
Thank you sir. Very articulate. I have been commenting exactly the same thoughts. It is amazing how people are not only fooled but defend the method hardcore. When I first came across Velocity Banking a few years ago, I also wondered why all the creators used the same numbers. Found out from one it was taught in a book they all used as a template. Using debt with a 21% rate to “chunk” payments on a 6% mortgage is not only absurd, it is certifiable madness.
Of course this method is justified as 21% simple interest vs 6% “amortized” interest which just proves the creators have no idea what those terms mean. Only thing I would change is this video is when you said Velocity Banking is better than just doing nothing and making regular payments. This is untrue, because, as I stated, 21% interest for six months is more expensive than 6% interest for six months.
Overall fantastic video with knowledge, truth and facts. Of course you only need to read the comments to see people tell you that you’re wrong because you “don’t understand how it works”.
Show me where a person used a 21% interest rate for the strategy. 21% is super high for ANY LOC. It is possible to still beat a 6% amortized loan using a 21% simplified with good cash flow. Do the math.
@@IamThatDudeIt will take some searching but the first several videos I saw on Velocity Banking used the same 21% vs 6% example because they were all using the same book as a source. 21% cannot beat 6%. They use the same incorrect logic, “simple interest vs amortized interest, which doesn’t exist. They mean to say compound interest. I have done the math. It tells me that 21% results in far higher interest than 6%. Can you please show me a scenario where this isn’t true?
@@confusedzentradi 1. If you understand the concept, you don't need me to show you; you can create a scenario by yourself. It is not ideal, but it is possible.
2. In an earlier comment, I pointed out that NO ONE would do 21% interest, nor would they have to. That is an unreasonable interest rate.
3. Cash flow is the key to this entire concept.
@@IamThatDude Thanks for your reply.
1. Many people say similar things, telling me I don't understand the concept or implying as such. I always respond asking them to articulate what they think I don't understand and asking them to provide numbers. So I ask you the same. Noone ever replies because they can't refute my numbers.
2. We agree 21% is exorbitant. You asked me to show where someone used 21% for the strategy. I dug in my CZcams history back to July 2020: czcams.com/video/ZJGktoOGvPc/video.html At that time I saw several CZcams creators using the same example and I found out they learned it from the same book. You can see my long comment on that video. You also stated it is possible to use 21% to beat 6% with good cash flow. That is factually incorrect. If you have good cash flow, you would use the excess to pay down the 6% loan. You would not borrow money at 21% to pay down 6%.
Let's forget 21%, as we both agree that is high. Many promoters of Velocity Banking use examples where they encourage people to borrow at a higher rate to pay down loans with lower rates, such as 10% to pay down 5% or exchanging a 4% mortgage for a 7.03% HELOC. The reasons/logic they use are terribly flawed. Simple Interest vs Compound Interest is also a flawed argument. 4% Interest with maximum compounding, called "continuous compounding" still results in lower interest than 7.03% Simple Interest. Some promoters even say that interest rate is irrelevant, regardless of how high it is, because somehow, the magic of Velocity Banking makes interest rate irrelevant. Don't hate on me, that is THEIR absurd commentary, not mine.
In general, in an apples-to-apples comparison, higher rate results in higher interest. This is objective reality. 7.03% on $10,000 for six months results in more interest than 4% on $10,000 for six months. All variables the same, except interest rate, which is the variable in question.
3. Cash Flow is very important. However, many Velocity Banking promoters clearly do not understand Cash Flow or what it is. They often espouse that paying down a credit card balance, to make more credit available to borrow, then charging expenses using that available credit, means that you have increased your Cash Flow. You have, in fact, increased your LIABILITIES, not Cash Flow. Available credit is not Cash. Using credit to pay for groceries does not increase Cash Flow. It creates a Liability that you have to pay later.
Cash Flow = Income - Expenses. If that number is positive, it means you have Positive Cash Flow and using that to pay down debts (mortgage, credit cards, etc) is a great idea. However, the way that Velocity Banking promoters explain Cash Flow is wildly incorrect.
Thanks for being civil in our discussion. Alot of people respond with vitriol to my comments. Several CZcams promoters of Velocity Banking have banned me from commenting, because they cannot have simple discussions with actual facts and numbers. If you are interested, I can share my calculations/spreadsheets with you.
@@confusedzentradi, great reply. Let's focus on two things:
**Let's use “amortized” and “simple” the way they are used in the video, for the point**
1. $20,000 at 10% simple, with a $2000 cash flow, will be cheaper than a $20,000 amortized 10 years at 6%.
2. Having a revolving line of credit is more beneficial than paying extra on a loan and not being able to use the money again.
**Using credit cards to cover daily/weekly expenses helps keep the interest rate down through the month, and cuts payoff time down.
What you are saying is the exact reason i was not understanding how they(Velocity Banking teachers) was coming up with their numbers. Thank You!
Very well said. In my opinion, the only time velocity banking makes sense is if you can get an introductory rate of zero percent interest for some period of time on a credit card, which you can draw on to “chunk” down on your mortgage and then pay off over that time frame. If you have a HELOC with a lower interest rate than your mortgage, you should really be refinancing your mortgage to a better rate (and probably to a shorter term), both of which would get your mortgage balance paid off faster. And if you have a credit card that has any interest rate above zero percent (and especially if the card rate is above your mortgage rate), you should always pay the full balance off so no interest accrues at all.
Yes, you could pay $1260 per 6 months. BUT remember your main objective here with Velocity Banking is to pay off large amts of debt. On the slide it shows that in the end you will have Save $45000 in interest on a 4 yr loan. That's a superb savings if you ask me... compared with the interested accrued on the credit card. Being able to leverage the LOC is probably the biggest benefit here then putting all your cash flow into the loan. Remember revolving (LOC) and amortized loans (home).
Hey James thanks for your comment. The entire point I was making is that you can just use the extra cash flow...In this case $2000 a month and you have the same results. You still save the same $45,000 dollars of interest. There is no savings with velocity banking unless you are using a loc with a lower interest rate. You can always have a loc available to you if you need it.
School of Personal Finance no you’re an idiot. You are missing something, a brain. Plus your math is flawed.
The points you get using your cards is another bonus.
Thank you for stopping me from being an idiot. You broke this down and explained it very well and I truly appreciate you for it.!
Thanks! I have more recent examples coming!
@@SchoolofPersonalFinance can't wait!
Perfect, that’s exactly how I put doing the HELOC strategy as well. Good job.
To each there own.
I've been on the Ramsey Plan for about 3 years. Only owe on my rental house and my personal house. With all the money free from not paying on debt. Should be debt free in 7 years max
Awesome!!
Congrats. However, if done correctly velocity banking would have gotten you there even sooner and with less interest and money tied up along the way.
Awesome!
Cedric, congratulations on becoming personal debt free! I am assuming that you are cash flow positive, have a good credit score, and would like to decrease that 7 years to 4 or 5! Would you listen to a plan that could do that even if Dave did not approve it? You seem like a very reasonable person and I would like to share my hybrid system with you!
@@Sci-Fi_Fan296 That’s true and the hybrid concept I am using is even better. Want to know more?
Honest question...if you can afford to pay down/off the HELOC, why not just put what you can afford onto the principle of the mortgage in addition to your mortgage payment? Why go through the extra step of the HELOC if you have positive cash flow? For a HELOC to work, you need to be able to pay it off.
If you made 10k per month and you had 6k in expenses, would you put the entire 4k you have remaining towards your debt leaving you with no money for emergencies? You'd probably out 1k towards the debt and 3k into savings for an emergency. What if that emergency does not happen for 2 years and the emergency is 10k. You'd have 72k-10 = 62k just sitting there doing nothing and you would have only paid off 24k in debt with the additional 1k per month.
The LOC allows you to put the entire 4k extra at the deb without having to worry about having money for an emergency as the available balance of the LOC is your emergency/savings account until the debt is paid off. If you were trying to pay off 30k with an additional 1k you'd probably take 25+ months to do so, but if you did it by paying off the debt via a LOC then depositing your entire 10k monthly income into the LOC and pulling out your 6k expenses you'll essentially be paying off the 30k debt at a rate of around 4k per month. You'd save on time but most importantly on interest. 30k/4k = 7.5 months.
Here is the kicker... After paying off the debt in 7.5k you can now save at a rate of 4k. So, if we were to go back to the emergency that comes up 2 years after you begin saving 3k you'll now have 66k in savings at the rate of 4k per month for 16.5 months. 24m-7.5m =16.5 months. Either way, you win...
@@RedRyz3n thanks for that answer. It gives me quite a bit tho think about!!
I was a little confused at first since I believe that Velocity banking is a great concept. But then I realized you are talking about what certain gurus are saying to use credit cards (with the high interest rate) to pay off the mortgage. That's definitely a bad way to do use the strategy and I am certain of it especially after watching your video! The concept works, but as long as you do it properly!! Will definitely keep in mind the last things you said at the end of the video. Great video and many thanks!
Thanks Jeremiah!
So OK. I am the type of guy who has to understand everything 100% before I step into it. I was watching all these HELOC velocity banking videos. I was convinced it was a magic wand. So I started doing some detail studying. And sure enough, on my own, I found out that its just not worth it. I realized I was better off just putting extra money into my existing loan with 10 years left on it. Then I saw this video and I watched it because he had come to the same conclusion. So all I can say is that I agree with this "School of Personal Finance" guy. Thanks for the great video
Thanks Craig!
My timeline using velocity banking.
August 2019: S&P 500 is 2,900 Borrowed $50k from 401k to start a business.
January 2020: Got approved for $200k HELOC
March 2020: S&P 500 is down to 2,200 used $46k Heloc to payoff 401k loan
September 2020: Heloc balance now $25k@2.615% 1 yr fixed rate from wells fargo.
Still good on the business side, able to pay the heloc this year.
I got lucky to sell(borrow 401k)market high and buy(payback 401k loan)market low.
Warning though, seeing you have close to $200k available to you with a swipe of a finger gives you a false sense of security.
I can see why a lot of people used and abused the "debt weapon" back in '08
That's why I'm trying to pay it off as fast as I can, I guess that in essence is the goal of velocity banking, to get out of debt as fast as possible.
Nice! The timing was great. Also sounds like u were able to start a successful business. From what you described you made solid financial moves. Did you actually use velocity banking? I don’t think borrowing money at low rates on a HELOC, starting a business that generates an income and then using the extra cash flow to pay off the debt makes it velocity banking. I would say that it is just being smart and using debt effectively.
School of Personal Finance How is it not velocity banking? I used multiple debt tools to start a business that otherwise I wasn’t able to if I just save for it, might have taken years. I am putting all my income to the HELOC to lower the balance and then use HELOC to pay my bills, and with positive cash flow, the HELOC balance goes lower. Velocity banking can help with paying debts, be it mortgage, car loan, credit card debts. Once I’m done with this current HELOC balance, I will do the house which thankfully only has $100k left that’s now worth $600k.
For me the 2 things that I need to do this:
1. Positive cash flow
2. The debt tool aka HELOC apr 2.6%
BOj iam I hear what ur saying...but what I hate about the term velocity banking is that all these guys selling high cost coaching services make it sound like they create all this cash flow and can show you how to pay off your debt in 5-7 years with out changing anything.
Here is how I look at your situation - u borrowed your own money that you saved in a 401k with probably very low or no interest cost and started a business. So that was money you already saved.
You use a HELOC which is equity you have built up in your home to pay down higher cost debts. Same thing as consolidating debts into one loan with a lower rate. All smart moves. You then drop all your income into the HELOC to pay it down and save the interest that would have accrued daily if u left the income in a checking account - smart move. You pay ur bills and the excess cash flow is left to bring the balance down. I get it...
My point is the only savings you are getting throughout this entire scenario is the 2.6% interest during the short period of time that your income is sitting in the HELOC before you send it out. It saves you money but it is not responsible for you starting a business and paying off tons of debt. And my big point of this video is it makes no sense if the debt tool has a higher interest rate than the debts you are paying off. You would be better just paying the debt down using excess cash flow.
When I was making mortgage payments I made 2 seperate transactions. 1 to pay the standard mortgage payment and 1 to be applied toward principal paydown only. Sometimes banks will continued to apply the principal payment toward the next months interest.
That's simply not correct. If you pay early, it goes to the mortgage. This is legally required.
I stumbled onto the "velocity banking" topic and youtube, and was completely confused. The 2 pieces of information that seemed to be missing from the velocity banking explanations were the difference in way the interest is calculated for mortgages and HELOCs, and the analysis reconciling arbitraging between the two rates. But this videos explanation is easily at "stand up triple" if not an "inside the park home run". Thanks for the explanation and your final recommendation on how to implement!
If you use velocity banking the $2000 balance drops every month so you end up paying off the card a lot faster and because you put your money into it upfront you don’t have to make the $600 basic payment. It saves you a lot more than $20 a month.
Replace your Mortgage completely with a 1st lien HELOC.. then transfer equity annually into properly designed whole life insurance policy.
Read Becoming your own Banker by R Nelson Nash
Great mention!
How do you transfer equity?
@@opstech2008 with a HELOC you have the ability to move money in and out freely, and my policies are linked to my HELOC account. So as I pay down my home, I have the ability to pull the equity and put it into my policies.
The policies are where you want the equity because its ever increasing, not like real estate.. gradually real estate will tick up, but much slower.
Once money is in the policies its just as liquid.. like a line of credit. The beauty of it is this, it increases every year. The increase is dependent on how much you put it. Typically after year 3 you put money in, and it grows by a bigger number.. you get to years 10,15,20,30 it grows by multiples ( you pay in 1$, it grows by 2,3, or 4)
I got scammed by velocity banking for a year. This man speaks the truth. Remember what your grandpa taught you “if it sounds too good to be true it probably is”
Care to divulge what happened?
@@edwarddejesus4465 it’s smoke and mirrors. You think your paying off your home faster but you’re actually just paying more in interest and putting more money into your home. Why would I want to pay off my home early when there are so many better investments that have higher returns? Doesn’t make sense
I did the apples-to-apples comparison for my mortgage and sure enough, the interest saved on the mortgage is the same where you make a lump sum or split it into any number of payments. I'm thankful for this video!
it's always better to use a HELOC over a Credit card any day, and you bring up good points I agree with this approach. I always tried to target the lump sum payment over taking on more debt to pay off debt... The only time as you said to take on debt is to make more from that debt than the interest to service it ei "Sound" investments.
Great video. I never bought into velocity banking. The idea that there's some magical way of paying off 500k in mortgage debt without paying off 500k seems silly. Even if you paid zero interest you'd still have 500k to pay off. So the idea of taking another loan with interest (credit cards, heloc, etc.) to pay off my existing loan with a "significant benefit" in interest savings seemed ridiculous.
To pay off a fixed like a mortgage debt you simply have to pay extra towards your mortgage every month, or every year. It really isn't that confusing. The rate in which you're borrowing from a credit card or HELOC has to be lower than the rate of your current loan. Duh. Now if you're getting points, or fly miles, etc from using a credit card so be it.
My wife and I use our Costco Credit card for everything. We pay it off every month in full. We get back between $1300-$1800 annually in cash rewards. We get a check from Costco. We paid zero interest. Win.
You are 100% correct. It's not that hard to pay off your mortgage early if: 1) You did not buy too much house versus your ability to generate income; 2) You are wise with your finances and know where every dollar is going (create and maintain a budget); 3) You have a consistent source of income (job, career, business - not "gig"); 4) You have an emergency fund that equals six months of salary so that emergencies do not cause you to stop paying off your mortgage; 5) You conduct recurring additional principal payments each month; 6) Most important, track everything. Your money is your number one business activity - you have to treat it as one. I created a spreadsheet (Excel) where I track all my finances, including a tab that tracks my mortgage and replicates the amortization schedule and shows my remaining balance (principal, interest, etc.) with each payment.
If you are not prepared to do these things, you are not ready for a house and need to wait it out.
I’ve looked into this quiet a bit. Great way to focus on budgeting. But it’s the same in the end with making extra payments. The key factor in velocity banking is you get to keep your liquid handy instead of giving it to the lender every month where you will never have any access to it.
Thank you
That's exactly what I'm learning from this process.. If you want to keep your liquid, then velocity is for you.
What you stated is what they are doing now for velocity banking. They also say to have a bank account with the same bank you have the HELOC with so that you can transfer money to it for paying those you can't pay with credit card. So the new accelerated banking is using what you stated now with their program.
We actually had a $1200/ mo mortgage. We added just $200/mo most months( maybe 9 out of 12) and some months $100. We chunked down fast. At 79% debt to value on mortgage, BANG! Got a less percentage And dropped mortgage insurance. Re invested it into mortgage pyt as we never saw it anyway.
Super accelerated.
In Australia we have redraw home loans where you can put your whole paycheck into the loan use the credit card for expenses then redraw the money from the home loan at end of month to pay the credit card. Or also offset accounts which whatever sits in there offsets the balance on your home loan so interest is charged less what is sitting in there. These options sounds a lot safer and u aren’t using interest or fees to make the chunks
The velocity banking concept was created for those of us in the US who do not have options like yours in Australia. I was amazed that having a 30-year mortgage is not really a thing in Australia.
In the US it's called the All In One Loan. CMG Home Loans
Velocity Banking works...I believe the ones that make it sound complicated are just trying to sell you something (nothing wrong with that)
Your closing statement describes Velocity Banking in simple terms
Using a HELOC to park idle cash to save on interest works. If that is what everyone is calling velocity banking than I’m good with that.
School of Personal Finance .... I also use 0% balance transfers for amounts that are paid off when the promo is over and use a credit card with points that is paid off monthly..
I paycheck park my income into my Line of credit until funds are needed to pay my bills...
Velocity banking has helped me increase my credit limits an my credit score...
Nice!! All smart moves!! But just to play devils advocate...you are saving some interest by making those moves but Paying down thousands and thousands in debt is a result of spending less than you make and being financially responsible. Not saying you shouldn’t save on Interest when you can but if you don’t have extra cash flow and you have been bad with money all along velocity banking is not going to change all that for you
School of Personal Finance ..... yes, you must definitely spend less than you make...
Before Velocity Banking my debts were spread to thin and It was tough keeping up even though I have a decent income...
Watching VB videos taught me how to consolidate my debt, how to leverage lines of credit and reduce the amount of interest I’m paying...
Velocity Banking only works if you make more than you spend...
The education you have received is worth more than the interest you saved 🤑Awesome job!!
This makes way more sense than the strategies they're talking about in other videos.
Maybe I can't understand them bc I've already got a decent way of paying things down, it's just tough.
Thanks!
Thank you!! I just learned about this idea today and at first it made sense to me until I watched your video. You made it much clearer to rethink it and do what I’ve already doing. I only have 1 credit card with a $4k balance but I’m looking to purchase a home and wanted to know how to pay it off quickly
Good for you! 🤗 Make sure to, at the very minimum, pay your CC on or before the monthly Due Date. If you can pay-in/-off more each month that's great!
Also, really try to get below the 30% level of your CC's credit limit, as going/staying above may affect your Credit Score (and may affect a Home Loan!!)
@@maxlove4906
Yes, I always pay it before the due date and pay more than the minimum.
@@maxlove4906 it’s a $17k limit so I’m way under the 30% usage. Thank God. I will pay it off very soon.
I currently use a 0% offer for 18 months credit card to pay my expenses freeing up cash flow to pay down my HELOC. I’ve paid off 88k in debt over the last 16 months using velocity banking. Because I’m leveraging big chunks at a time from my HELOC, i have more motivation to pay down the LOC so I’ve become more frugal because of velocity banking. I’m also accruing 5% cash back on groceries with that 0% card. Most VBing dudes won’t recommend a debt weapon with an interest rate higher than 12%
That is awesome!! Congrats! Yeah man the 0% credit is great as long as you can get them and use for expenses with no other fees. It is important to understand that your savings is just the spread on the HELOC and your credit card. So while it helps...that is not the reason you paid off $88k in debt. You did it because of all the other reasons you mentioned. Motivation, focus, being more frugal and throwing everything at paying it down faster. That is where velocity banking shines. When it forces you to reevaluate everything you are doing and then optimize it. BUT it is NOT the interest savings from doing velocity banking that made your $88k go away.
School of Personal Finance Thanks! Yes, it really is the mindset that I have since starting this strategy because now I know where every dollar is going... Awesome vid as usual🤙🏾
It does work, just not as magically as the proponents claim and not really better than simply paying the same amount extra towards the principal.
It's just simply over-hyped.
Exactly!! Thanks Dan
You’re not wrong but it depends on what your financial goals are.
This is so much clearer then most of what I've seen
Hey thanks for making it clear. GREAT PRESENTATION👍😊👍❤
Thanks Anj!!
So glad you brought up the issue of trying to make your larger payments (mortgage and car) via credit cards. It's darn near impossible.
yOU HAVE TO TAKE A CASH ADVASE ON A CREDIT CARD AND THEN PAY FROM YOUR CHECKING ACCOUNT.
Thanks for the info. I agree with you. I've watched vids on velocity banking and they make it appear like it's miracle cure. I'm sure it is for some, but it wouldn't work for us, in our situation. I subscribed to your channel and believe in your logic. Keep up the good work. I really appreciate it.
Thanks 🙏👍🤑
Velocity banking is absurd. You don't need to open up a line of credit to commit more of your paycheck to pre-payments on your mortgage. Glad you didn't go for the miracle cure 😊
I saw a video on this yesterday. In a nutshell its usijg your HELOC, Credit Card, or whatever other line of credit as your emergency fund. Its a game if musical chairs that comes with a risk.
Let's say you own $100K on your house and you have $100K in the bank. You could pay off your mortgage but you don't have any money for emergencies. Now lets introduce a $100K line of credit. You can now use the $100K in your bank account to pay off your house and if an emergency occurs you can pull from the line of credit. That's really what you are doing on a smaller scale.
Its a decent strategy, but you need to be aware of the risks. If something happens and you can't pay back the HELOC or credit card, you essentially converted your mortgage that accrrued monthly at a lower interest rate to a HELOC that accrues daily at a higher rate, or a credit card with a very high interest rate.