Originally posted by @Account Closed:
@Daniel Weed you can do it by hand and see how much money you'll save fairly easily. Granted it won't be 100% accurate. BUT a $5000 HELOC at 16% (my personal line of credit is at this rate) would cost you $800 a year. And that's by never paying it. So If you were to implement this strategy, your average daily balance would be less than the max 5000 most of the time. But even at $800 you can see that a single 5000 chunk, on a 100k house, you'll shave off around 24k in interest alone. Even if it were to cost you the full 800 a year to shave off 24k, it's worth it.
The heloc strateygy is technically making payments to your principle. But by paying an extra 100 or so (can’t imagine many people being able to dump that much extra per month into it) it barely dents it. It’s the 5000+ chuck that you take out that you see tons of interest get reduced.
Also, should you need the money, and you are just paying extra payments, you can’t get the money back. If you were using your loc as a savings account like the strategy suggests, you could always pull from it in an emergency.
If you’re worried about rising interest rates, even at 22% a 5000 heloc would cost you a MAX of 1100 a year while initially saving you about 24k in interest payments based on a 100k house, just use a smaller heloc. Don’t use a 25k chunk. Use only a 5000-10000 chunk that you can more quickly pay back. Even if you have access to a 25k heloc, the extra buffer you aren’t using can be used for emergencies. And a heloc is a much lower rate than a credit card.
You're clearly missing the point.
Obviously paying down your principal, whether using the velocity banking method or simply throwing extra savings towards the principal will save in interest over the life of the loan. NOBODY has ever argued against that. If you didn't realize that, you weren't paying attention.
I would never say this method doesn't work. I'm arguing against the ridiculous claims that it's SO much better to borrow money at a higher rate to pay off a lower rate debt.
You use the figure of $5,000 at 16% being $800. Okay. So let's say the mortgage is 6%. That $5,000 left on the mortgage only cost $300 for the whole year.
What good would it do to pay the $800 to do this method when you could just pay your extra money directly against the principal and not borrow money at a higher rate to do so? That would save $500 that year and allow you to apply that $500 towards the principal, increasing the velocity at which you pay off the loan.
Then, you can still keep that 16% heloc completely free for emergencies, keeping all of the benefits with none of the drawbacks.
And why do you think people couldn't put an extra $100 towards their principal every month yet could pay off an LOC balance of $5,000 on top of their mortgage payment??? If someone doesn't have $100 to spare each month, they couldn't do that method in the first place. Even with $100 extra a month to spare, it would take that person over 4 years to pay off that 5k (5000÷100=50 months). That would defeat the entire purpose and cause you to remain in debt longer than the 30 years of that original mortgage. It would take you backwards.
The whole premise is that you need to have extra income just sitting there to get the method to work.
