All Forum Posts by: Mike S.

@Clark Kirkpatrick

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Originally posted by @Jerry W.:

@Karina Ruiz, I have not dealt with this in years.  Many years ago I tried to get a guy to post in the thread the exact numbers for a named insurance company that I could call and verify the numbers with.  He kept offering to do it offline, but never online, so I called him out on it.  As I understand it the benefit is based mostly on the fact that the over funded life insurance policy will earn you like 7% interest and the life insurance company or a bank will loan you money at 2 or 3% interest to invest that money.  Why would a life insurance company pay you 7% interest on 85% of your fund and then loan the money back to you at 3%.  I just don't see them doing it.  Why would they pay you 4% more in interest on your money while they loan it back at a lower rate?  It does not seem logical.  I have not done any research in the last few years to test out their claims.  If it seems too good to be true it usually is.

Whole Life will get you a return in the range of 4% to 6%. Index Universal Life will get an average return of 5% to 8% but with more volatility (some years will be 0%, while some other may be up to the cap that is around 9% depending on the insurance company and the indexing method chosen).

When you get a loan out of the policy, the whole amount in your policy continues to grow as you never withdraw money from it, but instead used it as a collateral for a loan from a bank or the life insurance company. Usually a bank loan will be cheaper, but you will have to repay it. A policy loan rate may be higher but you don't have to repay it back nor pay the interest if you don't want to, as it will be payed back from the death benefit when you eventually pass away. With an IUL, some years you will have positive arbitrage with your loan, some year it will be negative depending on your indexing return. You can also get a fixed rate loan that will be at the same rate than your crediting rate, basically making it a zero fee loan, but you are also missing on potential growth.

Originally posted by @Joshua S.:

Yes, I know I'm paying principal. I've been explaining that over and over. That's the whole point of a mortgage whether it's a fixed first or a HELOC. What I have been saying is that my "cost" is $1000/year worth of interest on the HELOC. Pretty funny that you're saying I'm the one who doesn't understand. LOL

Good luck to you, too!

You are not consistent. You are saying that you don't have extra money to pay the principal on your mortgage and that is why you are using a HELOC, but you don't consider that you have the money to pay the principal back on your HELOC...

Personally, I would go all the way with the IUL as it will lower your earned income and is protected against creditor. You can also store away way much more money than in an IRA or 403. Last, life insurance usually are not counted for financial aid tuition purpose for your kids.

However, be aware that by lowering your earned income, you are lowering your social security wages for retirement and will also look less suitable for a lender who relies on w2 income.

Just make sure that the insurance carrier used by your employer is a highly rated one as your main risk is that the insurance company does not honor its contract with you. Also, verify the way the policy is structured to have it maximum overfunded, where the death benefit is minimized with the maximum allowed premium going mainly to the cash value.

Regarding rate of return of IUL, while appearing on the surface a little bit lower than the stock market, if you take into account the indexing feature that avoid any loss if the market crashes, you will find that it is very competitive with it. But where the life insurance shines, is during the disbursement phase where you can expect to take out around 7 to 8% every year until age 120 thanks to the loan feature that let the full value growths. With a regular retirement plan, it is not recommended to withdraw more than 3 to 4% every year if you want to make it last 30 years. And last but not least, the life insurance will give you heirs tax free a big lump sum, even if you pass away in your early years.

@Joshua Smith

You are not only paying interest on the HELOC. You are also paying Principal...

Count all the money that you you are putting in your HELOC and you will see that if you were putting all that money in your mortgage instead you would be ahead.

But obviously you don't understand that. Wherever the loan is coming from it is still a loan that accrues interest. You are paying the interest. And HELOC rate are usually more expensive than mortgage. You are just playing with the time difference between when you get your salary until when you pay your bills. You are basically removing the cushion of a savings account and using the HELOC instead as your bank account. That part I agree saves money but is dangerous as HELOC can and have been frozen by banks.

I am glad that this system is working for you and making you better at saving money. That’s the whole point and you seem to be an excellent candidate for this system.

Good luck in your endeavors.

Originally posted by @Joshua S.:

1. Just paying extra principal is not part of the discussion. Most people don't have a ton of extra money lying around - they are looking for other ways to go about things. This strategy works for someone who has very little disposable income. Simply paying additional principal does not. Most people don't even have $400 saved up for an emergency, so they aren't paying extra principal, but that CAN do this strategy without an extra outlay because they're simply shifting debt from one place to another and paying it differently.

No it does not, if you don't pay back the principal of the HELOC, you are paying more interest on the HELOC that you were paying on the mortgage. You seem to forget that the interest that you pay to your HELOC is in addition to the mortgage. So you are paying more every month.

The way you describe it, you need even more cash to pay back the HELOC principal. The only thing that you do, is that you borrow from the HELOC to go to the mortgage. As long as you don't pay back the money that you borrow, you will have to pay interest. And the interest on the HELOC is usually higher than on the mortgage.

As I demonstrated before, you will get ahead if you would put that additional money directly into the mortgage principal instead of using a HELOC.

Velocity banking is fine for people who can't budget as it give them a plan to follow and force them to save more. But you can do better without using the HELOC and paying directly more into the mortgage.

Originally posted by @Joshua S.:

Let me present it in another way as obviously I didn't make my message clear.

Let's put the following scenario:

$100k mortgage, 3%, amortized over 30 years. (monthly payment: $421.60)

HELOC, $10k, 4%

Case 1:

Normal amortization of the mortgage without any additional principal payment and no use of the HELOC.

At the end of year 1 your mortgage principal will be down to $97,912 and you would have paid during the year $5,059.25 consisting of $2,087 of principal and $2971 of interest.

payment	principal	interest	balance
1	($171.60)	($250.00)	$99,828.40
2	($172.03)	($249.57)	$99,656.36
3	($172.46)	($249.14)	$99,483.90
4	($172.89)	($248.71)	$99,311.01
5	($173.33)	($248.28)	$99,137.68
6	($173.76)	($247.84)	$98,963.92
7	($174.19)	($247.41)	$98,789.72
8	($174.63)	($246.97)	$98,615.10
9	($175.07)	($246.54)	$98,440.03
10	($175.50)	($246.10)	$98,264.52
11	($175.94)	($245.66)	$98,088.58
12	($176.38)	($245.22)	$97,912.20
	($2,087.80)	($2,971.45)			($5,059.25)

Case 2:

Your scenario, taking a 10k HELOC loan, that will be payed back in one year. The HELOC is used to pay the balance down of the mortgage to 90k.

With this scenario, the balance of the mortgage at the end of the year will be $87,608 and you would have payed $2,391 +10,000 of principal and only $2,667 of interest.

However at the same time, you would have paid back $10,000 of principal of your HELOC and $216 of interest.

So, out of pocket you would have to pay $15,275 that year.

	mortgage				HELOC
payment	principal	interest	balance		principal	interest	balance
1	($196.60)	($225.00)	$89,803.40		($833.33)	($33.33)	$9,166.67
2	($197.09)	($224.51)	$89,606.31		($833.33)	($30.56)	$8,333.33
3	($197.58)	($224.02)	$89,408.72		($833.33)	($27.78)	$7,500.00
4	($198.08)	($223.52)	$89,210.65		($833.33)	($25.00)	$6,666.67
5	($198.57)	($223.03)	$89,012.07		($833.33)	($22.22)	$5,833.33
6	($199.07)	($222.53)	$88,813.00		($833.33)	($19.44)	$5,000.00
7	($199.57)	($222.03)	$88,613.44		($833.33)	($16.67)	$4,166.67
8	($200.07)	($221.53)	$88,413.37		($833.33)	($13.89)	$3,333.33
9	($200.57)	($221.03)	$88,212.80		($833.33)	($11.11)	$2,500.00
10	($201.07)	($220.53)	$88,011.73		($833.33)	($8.33)	$1,666.67
11	($201.57)	($220.03)	$87,810.16		($833.33)	($5.56)	$833.33
12	($202.07)	($219.53)	$87,608.09		($833.33)	($2.78)	$0.00
	($2,391.91)	($2,667.29)			($10,000.00)	($216.67)			($15,275.87)

Case 3:

Instead of using the HELOC, you use the same $15,275 than in scenario 2, but you use it spread over 12 months to make additional payment to your mortgage.

At the end of the year you mortgage balance will be $87,555. Better than in case 2.

payment	principal	interest	balance
1	($1,022.89)	($250.00)	$98,977.11
2	($1,025.45)	($247.44)	$97,951.66
3	($1,028.01)	($244.88)	$96,923.65
4	($1,030.58)	($242.31)	$95,893.07
5	($1,033.16)	($239.73)	$94,859.91
6	($1,035.74)	($237.15)	$93,824.17
7	($1,038.33)	($234.56)	$92,785.84
8	($1,040.93)	($231.96)	$91,744.92
9	($1,043.53)	($229.36)	$90,701.39
10	($1,046.14)	($226.75)	$89,655.25
11	($1,048.75)	($224.14)	$88,606.50
12	($1,051.37)	($221.52)	$87,555.13
	($12,444.87)	($2,829.81)		($15,274.68)

Let's make it clear.

The difference between a $100k or $90k balance in your mortgage principal is $10k.
If your mortgage rate is 3% with a balance of $100k you will pay $3k of interest that year. If you had only $90k balance you would pay $2.7k of interest. The difference is $300. $300 is also 3% of 10k.


Now if you use your HELOC to get this $10k, but your HELOC is 4%. You will pay $400 interest in your HELOC to pay your mortgage down and save $300 in interest. So yes it is negative arbitrage. But because you are still paying the same payment each month to your mortgage, you will pay your principal down a little bit more because the portion of interest vs principal has changed. But that additional amount is not magically appearing, it is just a shift from one pocket to the other. You are forcing yourself to save more because not only you are paying the same mortgage payment as before, but now in addition you are paying the interest of the HELOC on top of it. That is what is making the difference and eventually pays your principal down (with the penalty of the negative arbitrage).

Instead of paying that $400 HELOC interest, you would have used that additional money to add to your mortgage payment, you would get a better result eventually.

Many gurus are trying to explain that because you are paying more
interest in the first years of your mortgage it is at the bank's
advantage. It is not. You are paying the same exact rate of interest
each year based on your outstanding balance. If I could find a 30 years
mortgage at 2.75% interest only, I would jump on it as I don't mind not
paying any principal back at all as the equity in the home is frozen
money that I can't use unless I am doing a cash out refi or getting a
second position HELOC.


I repeat that for people who have problem managing money, velocity banking is a good script to follow to keep them in check. But if you are financially savvy, you may loose money due to negative arbitrage, and it can put you in a dangerous situation if your bank freeze your HELOC has you would have less reserve available.

Originally posted by @Joshua S.:

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.

You are saving interest if your HELOC interest is lower than your mortgage interest. If the HELOC interest is higher you are not saving money at all, you are paying more interest.

The only point of velocity banking is that instead of keeping some money idling in your bank account for a few days or week, you put everything back into the HELOC and use it as a bank account to withdraw money when you need it. Indeed the compounding effect of never having anything idling in your bank account can be powerful. However, be mindful that line of credit can be shut down or frozen by the bank for any reason. If you lose your job, get into a financial problem that your bank learn about, bank will cut you off your HELOC lifeline in a snap and you will not have anything left to recover as all your money will be stuck into your home principal. You still need to have a minimum cushion into your bank and/or savings account for these situations.

As I wrote earlier, velocity banking is a system that can be helpful for people who don't know how to manage their money and are prone to overspend. It will give them a frame on how to it. If you are budget conscious and keep track of your expenses, it will not add any value and can even be riskier and more expensive as the rate arbitrage between HELOC and mortgage is not in your favor.

@Joshua Smith

For me I am paying the minimum every month on my mortgage as it is very cheap money that I can invest somewhere else to get a better return.

And the fact that you pay more in total interest in the first years is totally normal. You are paying the same rate of interest every year, but the higher the balance, the more the amount of interest.

I want my balance to stay as high as I can as that is money in my pocket that I reinvest. When my balance is going down I can either get a HELOC in second position to recapture the blocked value or do a cash out refi.

So no, velocity banking is not for me. I understand the concept and it may be useful for some people who have difficulty managing their money by giving them a structure, but I do better myself.