Velocity Banking / HELOC Strategy - I'm Doing It + It's Awesome

[Joshua Silver]

So, I've posted on this since around May 2018 when I first started it and I wanted to give anyone who cares an update since 2019 was my first full year doing it. For those that aren't familiar with the strategy, the idea is that you have money idly sitting in your checking account that could be helping to bring down your mortgage interest (a massive wealth killer, imo). The problem is, when you put that money toward your mortgage you no longer have it in your checking account to pay bills as they come in. So, this strategy allows you to put your money toward your mortgage, but still use it to pay your bills when they come in. What you do is open a HELOC (some people say you should do a first position HELOC, but I disagree) and essentially take a small portion of your mortgage - say $10K (I do $20K) and put it on the HELOC. Then you basically use the HELOC as your checking account - you put paychecks into it and pay bills out of it - and as long as you are making more than you're spending, the balance will gradually go down. Then you repeat the process.

Detractors have said that it's pointless because the $10K in question is still charging you the same amount of interest regardless of whether it's on your mortgage or your HELOC, but that's missing the point and ignoring the benefits of how it works in the real world. The reason the strategy works is because of the difference in how it's paid down. For example, on a $200K mortgage it takes about 3 years and around $20K in interest to pay down the $10K when you pay on the bank's schedule. When you take $10K of the balance and put it on the HELOC it takes 6-10 months and around $600 in interest to pay down. Obviously, you can see the massive savings on both time and interest. Since this is essentially a way of paying principal early, you could achieve the same type of savings just using your emergency fund / extra income to pay down your principal early, but most people don't have the savings or want to use it for this purpose. This strategy allows you to pay principal early and save a bunch of time and money without using your own savings. You're simply rearranging the way you do your banking.

And if nothing else, think about your money sitting your checking account every month just waiting to do it's job. We're supposed to be investors who put our money to work. Would you run a business and let your employees sit around all day? This strategy - even if you can't get your head around anything else - allows you to keep your checking account working for you by continuously putting all your funds toward your mortgage, but still be able to pay your bills.

Anyway, in the end for 2019 I was able to put an extra $12K on my mortgage (this is additional equity, btw, so I look at it like a savings acct.) and save a little over $19K in interest. And that's all without skipping the proverbial lattes and saving like crazy. In fact, we had some extra expenses come up this year and could have done way better about budgeting and this strategy still worked really well. It's simply a better, more efficient way to pay down a mortgage and make sure your money is always working for you. The only "cost" to this strategy is the difference between my mortgage rate and my HELOC rate (eg. 4% vs 6%) to have the meowny in a different vehicle. I don't feel like calculating that right now, but I can assure you it wasn't anywhere near the $19K I saved, it was probably between $1-2K.

This strategy does take some work to implement, but it's been very worthwhile, so I would highly recommend doing it. Thanks.