Brad Hart (speaker) presents an instructional talk on "velocity banking": accelerating payoff of a 30-year mortgage by adding extra principal payments and then leveraging home equity via a HELOC in short cycles. He argues that using time-based interest-rate arbitrage (trading a long-term lower-rate mortgage for short-term higher-rate HELOC draws repaid quickly) can reduce payoff from 30 years to 15 years and, with HELOC cycles, to about 7.5 years, freeing cashflow to acquire additional properties.
Chapters
Advanced finance strategies, Velocity banking. Now, you're all familiar with a 30 year fixed mortgage. That's 360 payments, principal and interest over 30 years. Now, what if you paid not just the payments on time, but you added a payment for principal towards the end of the amortization chart? Well, you'd end up burning down at both ends. You're burning the candle at both ends and meeting in the middle. So you could pay off that mortgage in 15 years. Most people don't understand this is possible. You're saving a lot of interest by doing so. Now let's take it one step further. What if we took the equity that's in the house as we're doing this, and we open up a home equity line of credit? That's a line of credit, that's a second mortgage essentially against your house or second lien against your house. What that allows you to do is take out larger chunks of money to then pay it down faster. So maybe we take out four or six or eight months worth at a time and pay that all off and then pay back the line of credit. Now, why would you do this? You're asking because you're thinking, okay, well, you might get a mortgage at 4% or 5%, but the HELOC might be 6 or 8%. So why would you pay in more interest rate money in order to pay off lower interest rate money. But you haven't considered that 4% or 5% over 30 years is a lot more than 66% or 8% over a few months. So by using the arbitrage between the interest rates over time, you can pay off a lot faster. I don't want to break down all the math right now, but essentially where you get to is you can pay off using the same amount of money using this HELOC strategy and velocity banking, instead of 15 years, you're looking at now seven and a half years. So instead of having four houses at the end of 30 years, you could end up, if you just reinvested all that money, you could have eight houses at the end of 30 years.
