Welcome again, today in this article I will cover the velocity banking strategy in much details. I have spoken about it in my previous webinar. But the thing is in the webinar I just highlighted the main points of velocity banking without any details.
In the full article I will cover the following:
Part One is about:
- What’s the velocity banking strategy (First lien HELOC)?
- Dirty trick banks do to tie you forever.
- A practical example to show you the difference between the loan value you receive and the total amount you pay on an amortization condition of 30 years.
Part two is about:
- A comparison between velocity banking, bi-weekly payments, and extra monthly payments.
- Some terms you need to check out when you apply for
What’s the velocity banking strategy (First lien HELOC)?
It’s simple you want to get a loan to cover the existing loan with additional cash to cover any expenses, the HELCO strategy typically works as your credit card. You withdraw the amount and then you pay it back and then re-use and pay it back, and so on.
For example, the cash-out refinance, once you use the amount in the bank account, you will have to apply for a new application and go with the process all over again. But that doesn’t happen with the first lien HELOC.
[HELOC is your business credit card!]
Let’s highlight the best of the first lien HELOC strategy:
- It can be used for new home
- The money you have access to first lien HELOC is usually from 80%-90% of your home’s value in cash, but then again due to COVID-19 this percentage it might be a little
- The draw period is between 10-15
- In 2020, as per the com website, the interest rate of first-lien HELOC is between 4.75% – 4.86%. Which is more attractive than credit cards which are charging 16.32%, as a source of cash.
- The interest will apply once you start using the loan amount, which means if you receive the amount in July, but you start to use the amount in October
then the interest rate will start from October, not July.
- The interest rate might be fixed or variable, it depends on the property value and the bank guideline and how much the amount do you apply
Now let’s talk a little bit about the trick that banks do to tie you forever. You know what it said “numbers never lie”, so let me show an example then go and tell you the bank trick
Let’s assume that you have a house with a value of $100,000, and for a reason, you have decided to apply for a loan “normal loan, not first lien HELOC”, with a term of 30 years and fixed interest rate of 3.10%, are we good so far!
Yes, so you decided to make a down payment of $32,000 and asked for a loan value of $68,000. Then the bank told you that you will have to pay a monthly payment of
$422 ($290 goes for the principle and the interest & $132 goes for insurance and other terms), you approved and you got the loan amount, and you started paying
the monthly payments on time.
Take these numbers and calculate the annual payments you pay, then multiple in 30 years.
Compare your results with the previous photo
Also, I need from you to check the part where I divided the principle amount from the interest amount, as the bank isn’t going to tell you how much of the amount you pay goes for the interest and how much goes to the principle (actually loan value).
You will find that you have applied for a loan of $68,000, but you ended up paying to the bank $151,920 (that in case you still pay based on an interest rate of 3.10% for the whole 30 years without changing!!)
Does that make any sense?
Let’s move to the bank trick after you pay your monthly payments on time for 5 to 6 years, usually, the bank calls you to congrats you on your commitment in paying on time. Give you an attractive offer to lower your monthly payment with at least $75 (like instead of paying $400, you will pay $325 each month).
Is this a good offer???
Let me show what’s between the lines, and you can decide for yourself.
When you make loan payments, you’re making interest payments first; the remainder goes toward the principal. The next month, the interest charge is based on the outstanding principal balance.
So when you pay the first years of your loan payments do you pay for the principle? BIG NO. you pay the interest first till interest becomes zero and your payments go to the principle.
So back to the bank offer, when he gives you this discount or a certain percentage off from your monthly payment, what it means? It means that it gets you back to square one as his offer will come with new terms and count again paying for the interest.
He doesn’t want you to go out of this part. The bank wants to keep paying to push money to the bank.
Check out the following photo.
Can you see the red area, this called a dangerous area for you because you shouldn’t stay long there.
what should you do?
I found that people do a lot of strategies in order to reduce the payments they made to the bank, I will break through each one in the second part. Stay tuned!
https://www.youtube.com/playlist?list=PLwzU0yyiKG-hbVYv4jc2HoAVgQ2oZV151 https://www.cnbc.com/2020/05/01/homeowners-may-want-to-grab-this-emergency-lif eline-before-it-dries-up.html?&qsearchterm=heloc https://www.cnbc.com/2020/08/06/how-to-pin-down-financial-essentials-after-being-l aid-off.html?&qsearchterm=heloc
Writing by Rewan Emam