Velocity Banking-The Good, Bad, and Ugly

hey folks welcome back to real estate investing unmasked today we're gonna talk about velocity banking I had a viewer reach out to me be a comment below when I'm in one of my videos and he asked me his name is Denzel Denzel asked me to go take a look at one of his videos where he preaches velocity banking and I say preach because well the guy is a man of the heart he's a very good man his aim is to help people get out of debt as fast as possible and it changed her life around for the better and for that I say god bless ya he asked me to do a review on his video and tell him what I thought about about his methods for velocity banking and so I wanted to go and he's not the first one who's asked me about my opinion on velocity banking now he may have heard it called a couple other things you may have heard a debt weapon using a debt weapon or using a line of credit to help pay off your mortgage faster the fact of the matter is whenever you borrow money to pay another debt you're just increasing how much debt you have you're also increasing your risk having said that I had to create an Excel spreadsheet that would take his model take his numbers and put everything out there in the open his assumptions are that your mortgage the mortgage interest rate is 3.75 percent he shows that you have a monthly PMI payment of a hundred and seventy two dollars and seventy seven cents property tax monthly at ninety four dollars and seventeen cents county tax the mortgage payment etc now I put in two thousand dollars a month for bills gas and food and he put in there the possibility now this is where I think velocity banking has a positive thing to look at and this isn't necessarily velocity banking this is more denzel's idea I think Denzel has something good on this he says if you have the possibility talk with your bank and get them to approve the ability for you to instead of paying monthly into your escrow account for your for your PMI for your property taxes your county taxes see if you can get those separated where you can pay those every six months or every year depending on when yours are charged in your city or county if you're able to break those up and make lump sum payments when they're due that allows you in the process of making payments on the house to actually make a larger payment toward the house now doesn't make a huge difference but it does make a difference so that's where Denzel I think had something good going on for him this is try to break up your your principal interest taxes and insurance payment and try to make it just a principal and interest payment and pay your taxes and insurance separately now Denzel in his in his video he said that it wouldn't matter what line of credit what interest your line of credit would be at he also gave some other assumptions he assumed a line of credit of twenty thousand dollars he said that he would not borrow more than sixty six percent of that line of credit and I can tell you the whole idea of velocity banking for those that this is the first time you've heard of it let me go and describe it essentially velocity banking is where you get a line of credit you borrow against it in a big lump sum and you pay that big lump sum against your mortgage now that's not it you then take your your paycheck your normal paycheck and you put that onto the line of credit you direct deposit your line of your paycheck straight into your line of credit every time you get paid you pay all of your bills your normal bills through your line of credit and you try to keep your bills as low as possible in this method what happens invariably is you will pay down what you owe in the line of credit over a few months typically the ones that I've read the ones that I've seen the ones I've listened to you all preach about six months worth if you can pay if you can borrow just enough so you can have it paid off every six months then you'll pay off your mortgage fast now that's the general idea it's a lot to set it up but once it's set up it's it shouldn't be too terribly difficult it's a lifestyle change so you kind of have to get used to it if that's the way you decide to go now my method for paying off my mortgage faster it's very similar but instead of taking a line of credit borrow to do a big lump sum payment toward the mortgage instead what I do is I set up all of my bills to be paid automatically through my checking account through Bill Pay now my bank does it for free and I've had multiple banks that I've been with and every bank I've been with has done it for free there are some banks however that will charge you to do bill pay so you have to look at your bank your credit union to see what they're gonna do for you so the way that I do it the way that I suggest you do it is you build up an emergency fund of a thousand two thousand three thousand dollars whatever it is that makes you feel comfortable and essentially you build up that fund and anything over the top of that fund at every paycheck so if I get paid on Friday anything I have left in my bank account at that time if I subtract my emergency fund let's say my emergency fund with four numbers it lets say my emergency money fund was three thousand dollars and when I got paid I had thirty five hundred dollars in my bank account well the on the day that I get paid I will pay that extra five hundred dollars I have left in my bank account above my emergency fund and I will put that toward the principal on my mortgage then when the money comes in from my paycheck I take that money and I applied toward my bills I applied for food gas the things that are normal the things that you would spend your money on diapers whatever it is that you spend your money on trying to keep my bills low of course the same thing and then when the next paycheck comes whatever I've left in and maybe it's thirty eight hundred dollars this time I take the eight hundred dollars and I put it into or toward the mortgage I put it toward the principal is the same principle as velocity banking the only difference is I'm not borrowing from a line of credit to do it now in denzel's video he talks about it doesn't matter what interest rate you use and he gave the example other people are doing an example of twenty percent or twenty one percent if you're going to do the velocity banking you want to keep that interest rate of course as low as possible in my mathematical model and I'll show you to you right now in my mathematical model on excel I have all the variables that Denzel gave and the only time that I found that his model of velocity banking outdid my model of just paying extra toward the principal was wind the velocity banking was when the line of credit was charging less interest than the than the current mortgage so in his case with 3.75 percent being the percentage on the mortgage if the line of credit is down has to be lower than that so what I saw I made the computer do the thinking for me at three point six eight percent that's finally when the line of credit or debt weapon for velocity banking is break-even with me just paying the mortgage on my own instead of borrowing from somebody else and making payments to them so what I have found is there's no point doing it the velocity banking way if you were disciplined but if you're doing at the velocity banking way you also have to be disciplined because what happens is you get this line of credit that you build up and now you have money that you can pull from but maybe you didn't feel like you have that before and so maybe you have a little bit more Liberty and pulling from the line of credit because you see that limit is higher so what I can see easily happening is people to have less discipline pulling from that line of credit and actually raising it up too high now one of the benefits the benefits to velocity banking and Denzil this is this is one of huge benefits that I see and all the people that are watching is that with a line of credit if you're constantly borrowing from it paying up paying down the mortgage and then paying down the line of credit consistently paying on time because you're paying with every paycheck that you get your credit score your FICO credit score will go up under my method your credit score will not go up any more than it normally would have now that comes from two different points of view in my point of view I don't like to have debt I like to pay off my properties as soon as possible and have as many properties paid off as possible so now I have borrow and I will borrow money occasionally and that's usually to buy a property if I'm going to buy one but then I try to pay off as soon as possible if you're borrowing money and you're consistently paying off you will increase your credit score but if you're buying property outright cash you don't need a credit score it is faster and you pay much less interest if you just pay straight out of your checking out the extra that's left over now when it comes to amortized versus simple interest anyone that teaches velocity banking anyone that I've seen so far and I've seen multiple videos on people teaching this method every single one of them has brought up the the in fact have have brought up the idea of simple interest versus amortize interest amortization let me let me explain that advertise ation is amortization is just taking up how much you owe and splitting it up over a number of periods so if it's a 30-year loan you're breaking up that mortgage payment in 30-year payments 360 payments so that's 360 monthly payments that is amortization interest is not amortized interest is compounded and that's where a lot of people get it wrong now up here in the corner I'm going to post a I'm going to post a link to my video where I talk about advertising versus simple interest let me just break it down real quick and you or you can watch that video simple interest is is taking an interest rate and applying that toward a principal balance whatever the number comes up that's how much you pay done in the story so for instance where a lot of people get into this this problem in misunderstanding is they'll say for instance I have a $100,000 mortgage and if I have an annual percentage rate of 7% they'll look at that and say okay the first year I'm charged $7,000 that's seven percent on $100,000 the second year let's see I can't pay $10,000 off the second year I'm gonna pay seven percent on the $90,000 the third year seven percent on the 80,000 the fourth year seven percent on the 70,000 and so on and so forth and the people that are teaching a velocity banking they take a look at that and they say okay if you add up all this interest let's say over the period of 10 years or normal 30 year loan you're gonna pay about a hundred to one hundred and fifty percent of what you borrowed so if I borrowed a 100 thousand dollars by the end of thirty years I probably will have paid about two hundred fifty thousand dollars for that house 100,000 for the original that I borrowed and 150,000 on interest and then when they look at that they say look at how much interest you have that's advertised interest that's terrible the reality is that's compounded interest there's an annual percentage rate that 7% is not how much you'll pay over time that's how much you pay in one year and that's when people start bringing a pool with your line of credit if you pay off your mortgage faster look at how little interest you pay compared to how much you would pay if you over 30 years it's apples to oranges it really is that simple interest idea that would be as if I went to you and said I will lend you it's $100,000 at a hundred and fifty percent interest I'm gonna get a hundred fifty percentage but you'll have a hundred thousand you need to pay this person and then over 30 years you pay me two hundred fifty thousand dollars or over five years you pay me two hundred fifty thousand dollars or over one year you pay me two hundred fifty thousand dollars that's simple interest and the compound interest is whatever you owe at the end of that period whether it's compounded daily compounded weekly monthly or yearly annually whatever is still owing at the end of that period the average balance that is charged that percentage rate that you agreed on with your lender so that is compound interest so of course if it's compounded every month every year they're gonna take how much you're supposed to be charged for that month or for that year in percentage rate and keep charging the interest on that so if you were to compound if anybody to pace compound interest that is much worse than simple interest much much worse however there is not a single lender that I know of not a single letter that I know of that will charge you simple interest where they'll say okay I will lend you a hundred thousand in order to pay off the hundred thousand you have to pay me two hundred fifty thousand dollars back not a single winner do I know that will do that mainly because they're not going to charge you under fifty percent interest it's gonna look terrible on paper and if they said I'm gonna charge you seven percent simple interest on a hundred thousand dollars then over 30 years you'll have to pay one hundred and seventy thousand dollars period in a story you won't pay off in a year you on pay them off in 30 years is all the same so that's never seen simple and advertised interest so Denso that's to you that's to everybody who is watching this hell thank you for giving me the opportunity to take a look at your video I mean I'm attaching my Excel spreadsheet so you can see it there are some things that were unknowns for instance the income of the person I have found that the closer the income is to the amount that is paid every month the worst velocity banking is the better it is to use my method the more somebody makes each month above and beyond what what their mortgage payment is and Bill's the better off velocity looks so if I'm making $20,000 a month and my bills are only $2,000 then velocity bank is really good because you can pull out a lot and pay it off real quick if you're making $4,000 a month and your bills are thirty nine hundred dollars a month so you only have $100 to pay with it doesn't really work that great now here's a caveat to that the idea of velocity banking is to borrow enough that you can pay it off in six months so if I only could afford $100 a month extra velocity banking would teach you to borrow only about $600 to put it toward principle and then pay that down that's how I've been that's how I've seen it on the people who have taught velocity banking so while I think velocity banking if that's the way you are using to pay off your mortgage more power to you I think anyone who's paying off the mortgage quickly is doing a phenomenal thing there just is a faster way there's a cheaper way and velocity banking versus my method of banking it's almost almost the same as far as speed almost the same as far as savings my way is faster my way saves you more money velocity banking saves you a ton of money if you did nothing else but my way is faster and if you have any questions please ask down below if you like my video please give it a thumbs up if you don't like my video all I ask is go ahead and give me a comment why you didn't like my video and hit that down button twice and then hit subscribe thanks everybody until next time you

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Views: 65,742

Rating: 4.4951925 out of 5

Keywords: velocity banking, velocity banking for dummies, velocity banking spreadsheet, velocity banking explained, velocity banking concept, velocity banking software, velocity banking pros and cons, velocity banking calculator, velocity banking excel, cash flow banking, paying off heloc, velocity finance, how to open a line of credit, debt acceleration, heloc amortization table, velocity banking denzel, real estate investing unmasked, real estate investing, pay off mortgage fast

Id: P7G8YyJyzYM

Length: 15min 30sec (930 seconds)

Published: Thu Feb 07 2019