Why Velocity Banking Doesn’t Work for Mortgage

What’s up guys! You’ve probably saw this very popular video on Youtube by a “VANNtastic!” channel on how to pay off your Mortgage faster with velocity banking and save almost $70,000 interest. That video has got almost 2 million views. But, there is a big mistake in that video, and I am gonna show you why velocity banking is not a good idea. Instead of saving $70,000 interest the client of this lady will actually pay $10,000 interest more. Again, that was a bad advice. It looks like a good advice, but it’s bad. And I am gonna show you why Velocity Banking doesn’t work for Mortgage.

I don’t know if VANNtastic! channel simply made a mistake here (which can happen to the best of us) or if this lady is a bit bias, and maybe she is talking people into a PLOC (Personal Line of Credit) with high interest rates because she has some commission of that? – that I do not know. What I do know is that by following her advise people will pay more interest than they really should.

Velocity Banking example

Let’s have a look at what she says. This lady from VANNtastic! channel seems to be a financial advisor. She says her client has a mortgage debt $500,000 with 7.35% interest rate and a monthly payment of $3441.46. It will be paid in 30 years. The lady says she wanna cry when she hears about 7% or 4% mortgages. She says it’s much healthier for you to have a Personal Line of Credit with 12% interest rate. Wait a second… What? You already can feel that something is wrong here – how in the world 12% interest rate can be better than 7.35% interest rate?? But let’s have a closer look, maybe we just don’t see what she sees…

The VANNtastic! channel explains how to pay off a mortgage faster with velocity banking, and suggests that her client takes a $10,000 PLOC and puts it down on the principal balance of their home.

And there is a logic here, because we are talking about amortized mortgage. Let me explain it in more detail, and then I will explain why Velocity Banking will not work for Mortgage.

How does amortized mortgage work?

Here is your mortgage loan:

$500,000 with 7.35% interest rate and a monthly payment of $3,441.46.

The monthly interest is calculated by dividing 7.35% by 12 months:

7.35% annual interest / 12 months = 0.006125

The monthly interest is a fixed percentage. It is always applied to the remaining balance.
Your monthly payment consists of the principal payment and the interest payment. Amortized mortgage means that during the first several years the biggest portion of your monthly payment is interest, and you only pay a small part of your principal balance.

Then it gradually changes, and only on year 21 your principal payment becomes equal and then exceeds your interest payment:

So, if you look at the numbers, you see that even though you pay 3,441 dollars monthly, it will take you 2 years to pay only $10,000 of your principal balance. During these 2 years you pay a huge interest on your remaining balance. To be precise, during the first 24 months you will pay $72,829 in interest only, because your remaining interest is so big.

When it comes to mortgage or other kinds of credit, time is always crucial – the longer your remaining balance stays there, the more interest you pay to the bank. If you can shorten the term and pay it faster, you will save on the interest.

How to pay off a Mortgage faster with Velocity Banking (according to people promoting Velocity Banking)

VANNtastic! channel suggests to open a PLOC for $10,000 with 12% interest rate and put it down on the principal balance. So, you pay a big portion of your principal balance in one chunk. It will take you immediately to year 3 of your payment scheme and will allow to save over $70,000 interest which you would otherwise pay during the first 2 years. The maximum annual interest of your PLOC will be $10,000 x 12% = $1200. Which is much less than $70,000. On the first look it seems to be a great solution to “how to pay off your mortgage faster with velocity banking”.

And of course, you can repeat the same thing every year, which will allow you to save a lot more money and pay off your mortgage in 17 years instead of 30 years. Sounds good, right? But we need to remember that to pay off a personal line of credit you will have to find EXTRA money in addition to your Mortgage monthly payments. It’s YOUR money. These people promoting velocity banking make you borrow your own money and pay high interest!

Why Velocity Banking doesn’t work for Mortgage

So, why do we say that Velocity Banking is not a good idea? Why Velocity Banking doesn’t work for Mortgage? We need to be attentive to small details here. Look closely:

The fact that you put $10,000 on your mortgage principal doesn’t change the amount of your monthly payment – you will still have to pay the same payment $3,441.46 every month. But now you have PLOC, which you also need to pay till the end of the year, otherwise it doesn’t really make sense (you need to pay it off, because otherwise you will keep paying interest without getting any benefit of borrowed $10,000). It means, you will need to find additional money. If you break your $10,000 PLOC into 12 equal parts and add the interest, you will have to pay around $900 monthly in addition to your mortgage monthly payments.

Here is how your PLOC monthly payments would look like. The calculations below are rough estimates, because the interest is always applied AT THE END of the month based on the average daily balance over the month:

You don’t need a Personal Line of Credit to pay off a Mortgage faster

Let me ask you – if you DO have additional $900 a month, then why do you even need a PLOC to pay off your mortgage? All you need to do is just put that additional money down on your principal and pay off your mortgage faster. Remember that PLOC has a higher interest rate – it’s 12%. You really don’t need it. Let me say it again – you don’t need a PLOC to pay off your mortgage faster. Don’t put yourself into another debt. It is so simple! If you have extra money – just put it down on your mortgage principal balance, that’s it.

Let’s compare different scenarios and see the calculations in more detail.

Disclaimer: this article is not a financial advice. Please make your own calculations and see for yourself.

So, as shown in the table, your PLOC is $10,000 and has 12% interest rate. The maximum annual interest would be $10,000 x 12% = $1200. And if you break $10,000 into 12 equal monthly payments, you will be able to pay less interest in total – only $650 instead of $1200, because the interest only applies to the remaining balance – the more you pay off, the less interest you have to pay. The average monthly payment in this case will be $888.

You can repeat this every year – take $10,000 PLOC and put it down on your mortgage principal. And you will pay off your mortgage in 17 years using velocity banking. It’s real, it’s working, you’ll just pay more interest than you should. Let’s see exactly how much interest you will pay in this case. On PLOC alone you will pay $11,050 of interest if you break it into monthly payments:

Now let’s see how this Personal line of credit works together with the mortgage payment scheme. You start with $500,000 principal balance, so your first monthly payment contains a small principal payment and a huge interest payment. In addition to that you put down $10,000 on your principal, which allows you to save 2 years of interest payments. After 12 months you do it again, and you repeat the same thing every year.

So, after 17 years your house is fully paid using velocity banking. You have paid the price of your home, which was $500,000, you’ve paid $370,702.02 of interest in your mortgage, plus $11,050 of interest in your PLOC. In total you’ve paid $881,752.02. With standard 30 years mortgage you would pay $1,243,405.98 in total. So, you’ve saved a lot of money! Then why Velocity Banking doesn’t work with Mortgage?

How to pay off a mortgage faster without using Velocity Banking

Let’s see how your mortgage looks like if you don’t take a PLOC and simply put those additional $900 a month down on your principal. The average PLOC monthly payment was $888. Let’s put it into a mortgage payment scheme. Your standard monthly payment is still $3441.46 and you pay additional $888 down your principal, which decreases your remaining balance.

As you see, it will also take 17 years to pay it off (even 2 months faster), and you will pay in total $871,253.69 which is $10,498.33 less that with velocity banking.

It means that with velocity banking you will pay over $10 thousand more interest than you really should. And that’s why Velocity Banking doesn’t work for Mortgage.

Bottom Line – why Velocity Banking doesn’t work for Mortgage

The owner of VANNtastic! channel says she wants to cry when she hears about 7% or 4% mortgages. And it sounds like the Mortgage with 4% interest is something absolutely terrible. She says it’s much healthier for you to have a Personal Line of Credit with 12% interest rate. I totally disagree. Even more – her velocity banking approach would not be even possible without mortgage. Imaging if you need to take a $500,000 PLOC with 12% interest rate to buy a house – how would it look like? And how much interest you would pay?

I cannot say anything about the intentions of this lady, I can’t read her thoughts. But it’s hard for me to believe that she (a financial advisor) didn’t know about the option to pay off a Mortgage faster with additional principal payments, and that you will pay less interest in this case. That’s the reason why I wrote this article so openly and why I mentioned which video I am reviewing.

One thing we should always remember – velocity banking can only make sense if you have a lower interest rate in your PLOC. If you have a Personal line of credit with a higher interest rate, you will always pay more interest. And this is why Velocity Banking doesn’t work for Mortgage – If PLOC or HELOC has a higher interest rate than you mortgage, then it doesn’t make sense to use Velocity Banking – you will pay more interest in the end.

I recently made a review of another video from VANNtastic! channel about paying off a Car Loan faster with velocity banking. You may find it useful as well.

Thanks for reading, have a great week and see you soon!