405 Is Velocity Banking A Good Strategy to Use

http://moneyripples.com/2020/06/24/405-is-velocity-banking-a-good-strategy-to-use/

Chris Miles, the "Cash Flow Expert and Anti-Financial Advisor," is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host that has been featured in US News, CNN Money, Bankrate, Entrepreneur on Fire, and spoken to thousands getting them fast financial results.

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Hello, my fellow Ripplers! This is Chris Miles. Your Cash Flow Expert and Anti-Financial Advisor. Welcome you out for a wonderful show. Show that's for you and about you. Those of you that work so sticky hard for your money and you're ready for your money to start work harder for you. Now! You want that freedom. That cash flow. That prosperity. Today! Not 30 or 40 years from now, not some day in retirement, if the market smiles on you just the right way, but today. So you can have that life that you love. Doing what you love. With those that you love. But guys this is so much more, so much more than your own prosperity and not your own passive income and cash flow to be able to have that freedom to work because you want to not because you have to, right? It's so much more than that because as you become financially free, you can create a ripple effect in the lives of others too.

And that's what makes you a Rippler. That's what makes you so special. And I'm so proud to be one of you today because man, through you, I can create a ripple effect as well. And I've been so appreciative of you that have been joining in. You've been binging and sharing with other people and creating conversations that are different. That are out there today. Things that are actually above and beyond the status quo. Something that actually is real and works. And guys, I'm so proud of that. Thank you so much for tuning in and being a part of this movement.

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So today I want to talk about a strategy that I get asked about all the time and there's been different episodes. I've brought it up occasionally, but I want to put a focus towards this particular topic specifically with Velocity Banking, because people will say, Chris, have you heard of Velocity Banking? It sounds so awesome! Isn't it? Like, is that what you tell people to do to? Or what is it that you recommend with that? And well, what do you think about it, Chris? Like what do you think about the strategy? And so I want to dive into that because there's some things I like, and there's a lot of things I don't like with that strategy. And so I really want to get into that because if you're not careful, this could be the strategy that does you end. This could be the strategy that actually puts you in a worse position than you were previously. So I want to address that right now.

So anyways, so let's talk about the strategy. Those you've never heard of Velocity Banking. This is not infinite banking, right? There's a lot of banking concepts out there. This is not infinite banking. We're using your life insurance. It's not that strategy at all. It's not even talking about taking that money and paying off your house. No, we're not talking about that. Velocity Banking is simply this. You set up your mortgage to be a home equity line of credit, right? So you basically create a credit line as a home equity line of credit. That's your whole mortgage. It's not a second mortgage. Your entire mortgage. The first mortgage is that home equity line of credit. Now you have your paychecks automatically deposited into this home equity line of credit. Now, what it does is it pays down the balance of your mortgage.

So say for example, that your mortgage is $300,000. Your check comes in for $8,000. You know, now that balance pays down to 292,000, right? Which means your average daily interest being charged is a little bit less. And you start to pay your bills and everything else charging up from the home equity line of credit. And so what happens that, you know, at least if you're positive cash flow, right? If you're actually positive cash flow, this strategy pays down your house faster. And this is a big opportunity for people. And some people will even look at it from an investment standpoint. They'll say, Hey, I can use this to go and invest in real estate. Not necessarily pay down my house, but I could. By using that real estate to pay off my house and then charge it back up to buy more real estate and then use that cash flow to pay off my house, charge it up.

And between the cash flow, the real estate and my paychecks pay off my house faster and just keep doing it over and over. Now, when you run the numbers, they look kind of cool, right? Because you can't pay off your mortgage in 7 to 10 years, depending on your situation. Now here's the problem I have with it, right? Because if you go based on the calculations, if life is perfect, life is grand. Nothing ever happens. No hiccups, basically life doesn't happen. This is great, right? But there are some limitations here. First and foremost. Number one, why would I want to pay on something that gives me a 0% rate of return. Now you might say Chris, well, I save on the interest of the mortgage. That's true, but equity earns nothing in the house. Wether you have a mortgage or not. Your house will appreciate, or even depreciate in some instances whether you like it or not, right, by the way, if the market does depreciate, you're in a whole heck of a lot of trouble, because now you just pay down a mortgage that isn't worth something.

I'll tell you from the last recession. That was a big lesson I learned because I started applying extra money towards paying down my house, a bigger down payments, paying more towards principle, believing just like with the Heloc strategy, I can pull that money back out. Well, that's not always the case. So anyways, that's the first thing. It's first and foremost, do we really want to pay off our mortgage? Or could that be the very thing that costs us our freedom? Now and in the future.

Secondly, and this is kind of going on with what I just said, what I dealt with in the last recession, right? This is the biggest problem. And I've been saying this for a few years. When people keep bringing this up, I keep saying, Hey, the strategy sounds great, but I have seen this strategy blow up in people's faces by the way, this is not a new strategy. Just so you know, like the, I remember even the last recession people were saying, Hey, have you heard of this whole Australian line of credit thing? Right? It was like the whole Australian way of paying off your mortgage faster. And there's a lot of companies promoting that at that time. But again, I saw it fall short. There's a few problems with it. One first and foremost, these numbers only work. If you have positive cash flow. If you can not make your ends meet each and every month, your balance will actually run up and eventually you'll run out of money anyways. So first and foremost, if you're a spender, this could be a very bad idea. The ironic thing is secondly, if you're a spender, this could be a great idea. But if you're a spender, you probably would need to have forced payments towards your mortgage.

Not something that gives you choice, right? So if you're an uncontrollable spender, I still wouldn't recommend a strategy. I would say, go, just know, get a mortgage. That's still within the comfort level, but forces you to pay principal. Right? But when it comes to this strategy, though, if you're a spender, it doesn't ever, ever the balance doesn't actually go down. You kind of make this not worthless. Right? But it really does depend on you having extra cash flow. Because what they're saying is this, say that same example, $8,000, right? Pays down on your mortgage. It's from that 300,000, you were at tutor 92,000, right now, what if you only paid 6,000 a month in expenses? Well, now it runs the balance back up to 298,000. So now the balance is $2,000 less than before. You know, what else, what other strategy actually does the same thing? Just paying an extra principal on your mortgage.

It's exactly the same thing. It's just saying, Hey, all the leftover cash I've leftover every month, throw it onto my mortgage. Right? Throw on my mortgage. Here's a thing. If you actually have a 30 year fixed mortgage, which had, would have decently low payment, right? But the mortgage interest is much, much lower than if you got one of these Helocs. Cause if you get one of these Helocs, because it is higher risk and they know this, they charge you more interest. Now the interest has come down a little bit, but I'm seeing these interests just within the last year have been around 6% or 7%. And now it's either maybe around the fives, right? But still 6% or 7% when you could be getting three point something, nothing per cent, you know, like three point something on a 30 year mortgage right now, fixed, not a variable rate, but a fixed rate.

And if they do fix the rate, the problem is they're gonna fix it at a much higher rate than the going rate right now, too. And so there's a lot of issues there where you're actually paying more interest anyways. So if your goal was to pay out for mortgage, which again, many, many cases I don't agree with, right? It is a strategy, not a principle, but it's one strategy that could be effective. That is your goal to pay off your mortgage. I would rather go for that 30 year mortgage and just take my extra paycheck. Assuming I have good cash reserves for emergencies already in place. That's a big if then yeah, you could throw your whole paycheck towards him. Words paid off faster. And guess what? You will do it faster than using your home equity line of credit. Than doing this Velocity Banking strategy.

So that's a big point number one. Big point number two is again what happened the last recession, they cut back lines of credit. See, I thought I could just go to the bank and get money whenever I needed it. That's why I pay down my mortgage. But when they told me, they said, sorry, Chris, not doing cash out refinance anymore, sorry. We're not letting people get access to equity. I was trapped now, by the way, this was not 2008, 2009. This was starting in July of 2007. I remember I asked them, they said, Ooh, we may have requirements a little bit more strict. Come back in August. I came back in August, met all the criteria, but they said, Oh, do these other few things, these other hoops jump through, then we'll do it. Then September '07 came around. I said, okay, I did all your hoops.

My credit score is even higher than it was a couple months ago. Let's do this. Let's do this cash out refinance. Now what did I want the refinance? Because I can see the writing on the wall. I was negative cash flow. I needed to get that money out to be able to reposition things and get myself in a better place. Well guess what? September '07. They said, sorry, we don't do those anymore. And there was, all that equity I'd throw on my home thinking I could get it back out, was trapped. Then the double whammy was of course, because it was tracking because money was restricted from the banks. What happened then? All of a sudden, bam, the house prices came down. Now, any equity I did have, even if it was trapped in the house now is disappearing.

Understand that that's not a good thing to have happened to you. Right? So put money into a house to only watch it disappear with depreciation. It's just as bad as watching your stock market go down, right? This is where there's a big issue. And so now I'm not saying this is going to happen again. At least with the depreciating home prices, I'm sure it could happen in certain areas at some point during this recession, but I can definitely guarantee you because the banks have already started doing it. That they're cutting back on those lines of credit. Do you realize right now trying to find a line of credit. Home economic credit going above 80% is pretty much nonexistent now. That just happened in the last month. That just happened the last month. Guys, just barely. That's the thing. Banks are calling the shots here. The best thing you could possibly do.

If you're gonna use a Heloc strategy like this, right? And I said, this months ago. The best thing you can do is pull all that cash out and hold that cash. Hold the equity in your own pocket. Not in theirs because when it's in their control, you can't get access to it. Someone will say, yeah, but Chris I'm paying for that. Hey Chris, I got a hundred thousand dollars out on that Heloc and I'm paying 400 bucks a month. Good. How long could that $400 a month last? Forever? Yes, exactly. You know, you can keep paying that for 20 years, you know, but I'm not saying that's the strategy you use. I'm just saying, you know, when you look at worst case scenarios, there's a lot worst case scenarios that can happen. Now. Yes. The money still has to be paid back at some point. Somebody asked me the other day, they said, Chris, well, what do we do with this Heloc that we have?

I mean, do we, you know, and their's got the normal Heloc. Not this Velocity Banking Heloc. They like to wait, pay it back. After 10 years or 15 years, we're going to start paying this back. You know, more aggressively. They have a balloon payment that comes up at year, whatever. Right? And I said, well, here's the thing. First, are you going to be in this house this long? He said, well, I don't know if we'll be in this house that long. Well, once you sell your house, you pay off the loan. Anyways, as long as there's equity, which obviously is, cause they won't let you get out all of your equity. Great. You're fine. Not a big deal. Plus you're paying down on your, in their case. They're paying in the first mortgage anyways, because they're paying on that, that principal, Hey, your balance is going to be less anyways. So that's not a big risk.

Secondly, even if you do stay there that long, we refinance. We'll probably refinance it into a first mortgage or something like that. And fix the rate. We might do it sooner, either way. It's not a bad thing, you know? So I'm not opposed to the home equity lines of credit. Don't get me wrong. I actually think they could be great if you can get access to them. And that, that time frame, that deadline is quickly shortening. I'm just telling you that because the Helocs right now, the money you're able to get at home, they're restricting it. And there will be a point where they'll say, sorry, no more. No. We cannot let people keep cashing money out of their house. We've got to stop this or put a limit to it, right? So again, you know, imagine this habit, if you had this Velocity Banking, home equity line of credit, right? This Heloc.

If you had this Heloc in place that the Velocity Banking does where it's a whole mortgage, first mortgage, you pay it down. Maybe you pay down a hundred thousand dollars aggressively. And then also when they do, they cut back your line of credit to the balance. So say it was 300,000 before you paid a 200,000 and you think, man, if I keep going, I'm going to be good. In fact, I'm going to pay down a little bit more and then charge it up to buy some properties or do some things to get passive income. You pay down 200,000 bucks and they say, Oh, we just notified you by letter, but we already did it because it's effective. Last week, we actually cut your limit down to 200,000. So now you were maxed out, you can't get that a hundred thousand back that you paid off.

All that extra cash you could have in your control is gone. Kaput! It's out of here, right? That will happen. I guarantee it. And so I know those groups that are out there promote this. Like this is the strategy, but you have to understand. Principles first. Strategy second. The principle is not bad, but the strategy is flawed. Especially when you run into a recession. When we're not in a recession, this tends not to be an issue. Well, when we're in a recession, this is when you, you should not be paying off your home equity line of credit. If anything, you might be charging it up and try to keep it at the max. Because if you at least get it to the max or somewhere near there, right? Whatever you charge it up to, right? If you pull money out to invest it, right?

Here's the thing is that they're not going to cut the limit below the balance. They can't because that would make you upside down. That wouldn't work. So who are they going to cut back? The people have paid off or pay down their lines of credit. By the way, if you've have a payoff, home equity line of credit with no balance on it. It's very possible. They only cut the limit down or even cancel that home equity line of credit off your credit. Which by the way, does hurt your credit score. If that's now off your credit. So right now the strategy I would not use to pay off your house aggressively. I don't think this is the time to do that. Again. Individual circumstances can vary. This is not giving you blanket advice because there are some circumstances I might agree. Say, you know what?

Paying off your house would be the best opportunity for you with given your present condition. But for many, many people, those especially in the Velocity Banking strategy, I'm not a big fan. Again. I think I could get a fixed mortgage, put money towards that. Just get a low, low rate, much lower interest than you would pay on that Heloc anyways. You can pay off your house as aggressively as you want, but you don't have to. Right. That I think is a much safer strategy to go. Helocs. I love them if you're going to use them, Okay, I'd much rather. And I know I've done this in my own case. I ran up that home equity line of credit up to the max. I cash it out and I bought properties with it. That's what I did personally. That's not what you should do. That's not advice of course, but that's what I did to go and create cash flow now.

And that cash flow will exceed the monthly payment increase on that equity line of credit that I had way exceeded. So, it was, for me, it was a no brainer. For you, if you don't have the right connections, the right knowledge and things like that, it could be the worst thing you do. So again, it's not about what you do with the money per se, but it's about who you are as an investor and what connections and what things you understand and what you know and what you can do with it. That is the key. And I'm telling you, your house could be the key to your freedom. It may not be the way that they teach with Velocity Banking. That may not be the key, but there are other ways you can use your house very effectively and safely in a way that allows you to have cashflow and essentially have your cake and eat it too.

Right? You can have assets and cash flow too. So now your house has actually been paying you something versus just being an expense. And that's why people want to pay it off. Not because there's a balance. People don't care about the mortgage balance. They don't care about what they owe. They care what the fact that they have to keep making that of payment every single month. Well, what if you could use that equity to make money for you, that it made your mortgage payment for you? That would be pretty cool. Wouldn't it? That is the goal. That to me is a safer way to go than just trying to pay it off and I'll have, have the money. You know, mainly there. I granted, if you have a paid off house, great, the problem is in the interim. When you don't have a paid off house, you keep aggressively paying it down.

There is risk there because if you need money, you need cash. You cannot always pull out of a home. You cannot count on that. So either you're safe as bad as the other one property house a hundred percent or two use the equity from your home to create enough passive income to pay your mortgage payment or better yet pay even more than your mortgage payment. So those are the kinds of things. I would say that for you to consider before you look into velocity banking, really heavily considered that this may not be the time or the right strategy for you right now, or for many people right now. It could be one of the riskiest things you do. Beware of that strategy. Everybody hope you take it to heart. If you have questions, shoot me an email, Chris@MoneyRipples.com and we'll see what we can do to help you out there. Anyways, guys make a wonderful and prosperous week. We'll see you later.