Velocity Banking… is it a scam?
When I bring up infinite banking, many people as if it’s the same as velocity banking and it is not!
Velocity banking is when you use your HELOC to invest in cash-flowing assets. Sounds like a good plan on the surface, right?
Wrong, and listen to this podcast to find out why! Do better than a HELOC and start doing infinite banking!
See what a policy looks like for you RIGHT NOW: https://bit.ly/3Uvv9xV
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TRANSCRIPTS:
Speaker 1 (00:00):
Here’s the danger that many people don’t consider Every scenario I’ve seen when they do that, they always skip over one important fact. They skip over that. This is the most dangerous thing that I want you to be aware of because this is where so many people get tripped up. It’s this.
Speaker 2 (00:19):
Chris Miles was able to retire twice by the time he was 39 years old, but he’s not content to just enjoy his own financial freedom and peace of mind. Chris wants you to have your own ripple effect so you can live free today. He’s not the financial advisor you expected. He’s the anti Financianal advisor you deserve. He’s jumping behind the mic right now, ready to make waves. Here’s Chris Miles.
Speaker 1 (00:49):
Hello my fellow Ripples. This is Chris Miles, your cashflow expert in anti Financianal advisor. Welcome Schultz for you. Those that work so hard for money and you’re ready for your money, start working harder for you today. You want to become work optional where you work because you want to, not because you have to where you have cashflow today so you can live that life that you love with those you love. And most importantly guys, it’s not just about getting rich, about living a rich life because as you’re blessed financially, you now have a greater capacity to bless the lives of those around you. Thank you for tuning in today guys. Thank you for being a part of this show. Thank you again for subscribing. Obviously, we got our Max ROI, infinite Banking YouTube channel. You can check out as well if you haven’t subscribed to that, do that today.
(01:27)
We got lots of great videos on there as well, so be sure to check that out today. Okay, so I’ve been getting a lot more questions from you guys, especially about velocity banking. It’s almost like it’s coming back with a vengeance. Now, this was really popular. Now if you don’t know what velocity banking is, this is not infinite banking. This is not talking about life insurance. Velocity banking is specifically saying, I’m going to get out a home, make weed line of credit, and I’m going to use that to invest, but as I invest, I’m going to pay it down. So similar to infinite banking in the sense that you’re using your investment cashflow to pay down that balance. However, the one thing that a lot of people will teach is that they’ll teach you. You can pay off your house sooner and you can invest it and they’ll even teach you things like they’ll say things to the point of like, Hey, I’ll pay off my house in seven to 10 years, or I was able to get financially free faster doing this method.
(02:15)
Or they’ll even say things like, Hey, I just put all my paycheck in here and I’m free. All that kind of stuff, all the freedom stuff that comes with this. The one thing is when I had somebody ask me about this recently that said, Hey, have you heard of this strategy Velocity banking? Which just so you know, this is a strategy I’ve been hearing about since really the late two thousands, and I mean before even 2010, there was a strategy that people were talking about, talking about with the whole Australian type of loan, and now it’s just kind of morphed into what we have today in the us. And so I want to address what’s good about it, but also the dangers that go along with it. And there’s a lot more dangers than there are good, especially in today’s environment because there’s a lot of marketing, a lot of hoopla and hype that really just does not measure up.
(02:57)
Okay, so let’s talk about what this actually is right now. You always obviously know if you have a mortgage, you have that 30 year mortgage. It’s a fixed rate. Well, a home equity line of credit, when you do velocity banking, right, you get a home equity line of credit. So it’s like getting a line of credit, almost like a credit card on your home. But here’s the difference is that it’s often a first mortgage. So many times when people get home equity lines of credit, they’ll get a first mortgage and then they’ll get the second mortgage, and then that second mortgage is that home equity line of credit. If they get it that way. Home equity lines of credit do have a variable interest rate, although you could get a fixed rate, but you’ll pay much, much higher rates if you do, but they’re usually variable interest rates.
(03:35)
Secondly, home equity line of credit, it has a limit up to x percent of your home’s value. So let’s just say it pays off your first mortgage. Even if you have a first mortgage, you could have that paid off, potentially get more equity out. But here’s the thing, guys, is that yes, if there’s appreciation, you could actually increase that line of credit as time goes on potentially. Again, you have to always requalify. Here’s the danger that many people don’t consider when we move into recessionary times. They can take that line of credit away, and so here’s what it is theoretically, and then they’ll always show you these numbers. They’ll say, Hey, look, you put your paycheck in here. You eventually use this. You’ll cash out X amount of dollars to invest maybe a hundred thousand dollars to invest. And then you take that say 10,000 a year or that 800 bucks a month, you use that to pay down your line of credit and they’ll show you all the numbers and they’re like, but if you keep doing that, eventually your house gets the point of being paid off.
(04:27)
You can invest more and more, yada, yada, yada. Now, the problem with it is this, every scenario I’ve seen when they do that, they always skip over one important fact. They skip over that this person, this hypothetical person that’s paying off this mortgage has extra cashflow every single month, not just from the investment but extra cash flow above and beyond from the get go. So say for example, they assume that the person’s making $10,000 a month, but they only spend maybe 7,000 a month. Well, what it’s really doing is if you put your $10,000 paycheck to paying down that mortgage, right? So boom, there’s a big $10,000 hit. And by the way, I’ve seen people on YouTube, a lady in particular where she’s like, oh yeah, you’ll save yourself $63,000 or whatever it was, interest just from that one $10,000 payment. You get a six times ROI.
(05:20)
It’s again, total Bs. Just so you know, if you pay extra your mortgage, you’re better. It is true, you better off to do as a lump sum. But here’s the one thing she doesn’t say she doesn’t. The other half is you’re still bill paying out of it. You’re paying for your expenses, right? Again, this is something that’s similar like the infinite banking route that you’ve heard people talk about where they’ll pay their expenses from that, which I don’t recommend with infinite banking, and I also don’t recommend it with Velocity banking because they’ll say that, oh yeah, now you have that 7,000 coming out to pay your bills, and then boom, the next 10,000 a month goes in and then the 7,000 pays the bills, do the math guys, all that you’re really doing is paying an extra $3,000 a month. You’re just taking every available penny you have and dumping on your mortgage.
(06:03)
So let me show you what that looks like. Alright, so I’m going to take an example. Let’s just say that you have a mortgage that’s $400,000 and this is just a normal 30 year fixed mortgage that’s at 7% interest rate. Notice that the monthly payment is 26 61 a month. You also notice the total interest you pay is 558,000. Now when you have someone saying, well, look, there’s an extra 2000 or 3000 that’s going in, and they don’t emphasize this, but if you were to do that same thing, watch what happens here, right? Okay, so if I go ahead and put that money in here, right? If I go ahead and put that, let’s just say that I now make this. If I’m putting an extra 2000, let’s just say it’s 2000 bucks. I want to make this number 46 61. I did not pre-calculate this, so I’m just going to go ahead and see what I have to do.
(06:45)
Now, most even 10 years shaved off only does that. Let’s do 10 years. There it is, 46, 44. Now, how do they always say you paid off in seven to 10 years? Boom, you can pay off your mortgage in 10 years just by paying an extra 2000 a month to your 400,000 mortgage. Now, again, this is not a strategy I recommend. I do not recommend you trap your money in equity in your house. That’s dangerous. I’ve done that in the last recession, and that’s what put me in such a world of financial hurt and it actually put me in more debt because I could not get access to the savings, the equity. I started charging up credit cards because I wasn’t liquid enough. My savings ran dry and the next thing I went to was credit cards. If I had that equity in my own possession, it would be safer not to mention a lower payment.
(07:26)
So be careful of this. Now, again, remember 10 years, pay that off. But here’s the thing, if you get a home queen line of credit, now it’s interest only payment, right? If you get a home queen line of credit, like they’re talking about here at 9%, that same 400,000 would be exactly $3,000 a month. So one, it is going to be a slightly higher payment than what we saw before. Remember 30 years was 26 61, right? So you’re paying 3000 a month potentially or pretty darn close. You’re paying almost the same price. If you’ve got a home, it can line of credit for that same amount of money, but the difference is you’re only paying interest, not principal. So they’re going to show you if you pay the extra 2000 a month, well, let’s raise this now to 9%. Now I’m going to put this at 9% right here right now.
(08:10)
Now I’m going to get to the point of 5,000 a month. Why? Because the interest only is 3000. We’re going to add 2000 more a month. So let’s put it at 15 years. Nope, see? So get old. Look, maybe we do 10. There it is, 10 years. Oh, wow, amazing. So in that case, it’s a little bit more. It’s a little bit. We’ll go with 10 and a half years fine, 10.3, okay? So we’ll do 10 years, three months, and you pretty much have your 5,000 a month payment. So notice you’re still paying more interest. By the way, total interest, 213,000 you paid over that period of time versus it was about 160,000. So you paid 50,000 more in interest in the same period of time using the extra money. But remember that’s assuming had an extra 2000 month to throw on top. Remember the previous payment was 26 61.
(08:59)
So in reality, if we want to really make this apples, apples, we should be saying, no, no, no, no. If it was 26 61, that was our payment before and the only had was 2000 extra month, that means they only have 46 61 a month. I’m going to add more years back on, we’re going to just put that 12. There he is. So 11.5 is going to be roughly about what it’s, look at that perfect 11.5 years. So you now had to spend an extra year and a half paying on that same payment you would’ve paid on for that 7% fixed 30 year mortgage. That’s assuming rates don’t go up 30 could go down, but remember, I mean, people have been saying, oh, there can be huge rate cuts, but now just in the last few weeks, people are saying, oh, maybe it’s not going to happen the way it is.
(09:40)
I’ve been telling you this. So it’s great when the variable rate goes down, but again, the numbers don’t always play out. I would much rather, here’s what I would do, even if the rates did drop, that means also the mortgage rates would drop. I would just refinance the other mortgage and save more money on that, and if I wanted to, I could apply more money to it. So the thing is, if you’ve got an extra $2,000 a month you could throw onto your 400,000 mortgage in about 10 to 12 years, you could have that mortgage paid off. This is the most dangerous thing that I want you’d be aware of because this is where so many people get tripped up. It’s this. It’s that assuming that everything’s perfect in the market, right? Assuming that, of course the rates don’t go any higher, right? Assuming, of course that banks don’t have any stress, which we’ve already seen in the recent days, right?
(10:24)
In the last year or so, we’ve seen banks under stress. That’s why we saw some big banks fail, and there’s still stress on banks, and if interest rates stay higher, there’s going to be further stress on banks as well as especially those that have commercial real estate and things like that in their portfolio. There’s going to be a lot of stress. What happens when banks are under stress? They clam up, they tighten up, they restrict your access to money. Now, the money supply is still great right now, but banks are getting a little bit more scrutinous on what they’re allowing you to do. Here’s what I saw happen in the last recession. People that had home make equity lines of credit had the limits cut back. So for example, one of my clients, she had an $84,000 home make weed line of credit. Now, she only had about a $42,000 balance on it, and she was talking to me.
(11:07)
She’s like, Chris, I think my next project right now, my next best investment is investing in the education of my business so I can get certified to then be able to offer these services and be able to bring in more revenue. I said, cool, what’s it cost? 6,000 bucks. How are you going to pay for it? I’m going to use my home equity line of credit is it’s decent interest rate, low cost, and I know I’ll make a lot more money than the payment. I said, that sounds great. A few weeks later, she comes back to me absolutely just appalled. Okay? She was completely ticked off because she said, you know what happened? I just got a letter in the mail where the bank said that my line of credit went from, it was actually $86,000 line of credit down to 43,000. So remember, she had a $42,000 balance.
(11:51)
She thought she had 86 in there. Total thought she had about $44,000 she could still use. Well, the bank without warning cut down her line of credit to 43,000. So she only had a thousand bucks she could actually use there and basically had no money to pay for that 6,000 course that she was going to use to get certified. They cut that down. Now, that did two things. One, it restricted her access to credit, but two, it also hurt her credit score, which also makes it harder to get credit because what it looks like now is it looks like she’s maxed out her loan. And just like any credit card, if you max it out, it hurts your credit score. Well, now it’s doing the same thing to her credit. So her credit score drops not because she did anything wrong, but because the bank said, we’re restricting credit access to everybody right Now.
(12:34)
That could happen. Imagine if you’ve started doing this strategy. Maybe it was that $400,000 home equity line of credit, and you said, you know what? I’m going to pay extra towards this. I’m going to get it down to about a hundred thousand dollars. Then I’m going to use that to invest again. So you’re paying it down, you’re paying it down aggressively. You’re letting all your paychecks go in. All of your money’s going in there, you’re just paying a little bit of your bill pay and you’re paying it down, paying down. You’re like, I’m almost there. And then bam, you get a letter saying, last week we shut your line of credit down to $310,000, which is about where your balance is. All that extra 90 or a hundred thousand bucks you would just try to put in to that line of credit is now gone trapped inside your property.
(13:13)
For me. When that equity got trapped inside my property, I tried to get it out and the banks wouldn’t let me get it. They said, Hey, you’re a business owner. We don’t like giving loans of business owners right now, especially if you did real estate investing. We’re really nervous about that. They didn’t want to give me any access to credit. So what it was my next thing, I was like, well, how do I get credit? Do I get, do creative strategies, get some lines, maybe some personal lines of credit from friends or family and then use my home as collateral? There was equity in it, I just couldn’t get to it. I didn’t want to sell the house. Well, then it got to the point I was getting desperate. I needed to sell the house. But guess what happens when they restrict credit? Guess what happens to home values?
(13:46)
They can go down, especially if it’s a higher value of home. And so I watched all the equity disappear in the course of about 12 months. From 2007, mid 2007 until 2008, I watched the equity disappear to the point where I could no longer sell my house for what I owed on it, even though there was a significant amount of equity. Granted, I did have a little McMansion. It was bigger than the average house, but at the same time, that was a big lesson for me is I never want to lock up my money in prison. That’s a big risk you run if you try to use this philosophy banking strategy, if you pay down that line of credit and they cut it down and they can do it at any time they choose, that’s a risk. If the interest rates fluctuate, especially if they go up anymore, that’s a big risk.
(14:29)
And I’ll tell you the problem is right now, if you have a 9% interest rate, regardless if you’re trying to make money off of that, what kind of investments are you going to go for? Because I’ve already seen the temptation with some of our clients that have home equity reliance credit, wondering if they should use them. They said, well, I’m paying eight and a half or 9% right now. Well, I need to make at least 12. And so they start chasing returns. And when you start chasing returns, that’s when you start making dumb decisions. That’s when you make bad decisions with your money. You’d never want to get caught in an emotional place where you say, well, I got to make more, otherwise it’s not worth using. And the answer is correct. It’s not worth using. If it’s not making you more money, it’s not improving your cashflow situation.
(15:07)
It’s not worth doing, and it’s definitely not worth doing, trying to gamble with your money because you’re hoping and praying for higher returns to be able to create that arbitrage, that create that little spread where you make some profit off of it, right? Where you want to make 12% while you’re paying nine, so you still make that 3% spread, right? Those kinds of things. You got to be very, very careful if something goes wrong, it’s not, here’s the thing, what if that investment, you try to put your money in, stops paying you. If it stops paying you, you stop to make that payment, and if you can’t make that payment, your credit goes down the tube, right? It goes to the crapper, so to speak. So we don’t want that to happen. So it’s not that the strategy is bad. Again, I’m all about using home equity from time to time, but in the current environment especially, here’s what I would do.
(15:53)
I would stay more with that third of year fixed. If you can do a cash out refinance, if it makes sense to do a cash out refinance. Again, the numbers have to make sense. That could be a good option for you potentially. But home make lines of credit. I remember I said this to people, and even in 2020, if you’ve been following my show long enough, when there was covid and I started to wonder if banks were really going to get restrictive, I was starting to tell people, if you have a home make me line of credit and you’re looking to invest, you might want to get your money out now. Get it up to that limit and then figure out where that money goes. Now that I put a huge warning label on, because again, I’m not giving you investment advice or anything like that, but the big warning label is of course, is that again, the temptation is you have to find a way to make money with it.
(16:34)
So there’s got to be a plan for it still. But when I had clients that were already investing, they already knew the things they want to invest in. They’re debating about using their homemaker line credit. I said, you know what? Who knows if banks are going to cut these back? If you want to have access to more available cash, you may want to use it. Good news is property all appreciated in the meantime? So there’s still more equity that they have that they’re not using, and even though interest rates went up, if they’re in the right kind of investments, they’re still making a spread. It’s just not as profitable, but they’re still making more than what the loan is costing them. But again, that’s the important thing, and that’s where personally, when I’ve used homemaker lines of credit, I’ve always bought property, right? Something that I knew I had real tangible assets to versus just investing with somebody where there’s no claim to anything, any assets.
(17:16)
That’s why I never blow my money in, throw it into crypto or stocks or options or anything like that because I can’t trust those things. I can’t count on ’em, and there’s no real value backing them up. But if I have a property, at least I know there’s some sort of value that equity from my property becomes equity in another property. And so that’s where that can work. But again, that velocity banking strategy, that thing is getting so worn out and in the current environment, I’m just not a fan of it at all. And I would bet you that those that have done that and that maybe they’ve even been trying to do alternative investing with it as, and especially if they’ve done it with groups where they don’t really do well on the due diligence side, they may not be making as much money right now.
(17:55)
They might be having some stress because that home credit is not helping them at this point because they’re not making the cashflow to be able to pay those payments. So you don’t want to be in that point. So I’m giving this as a warning. Beware of velocity Banking right now, especially in the current environment. It doesn’t mean it’s always bad, it just means that currently, really the last few years, it’s been a very bad strategy to use. It’s not one I would rely on. And that’s why you need a good financial plan, has multiple strategies. You can do multiple things. It’s got flexibility. But if you stay with one strategy and you get stuck, you’re a toast, right? So you want to make sure that whatever you’re doing, your plan can be flexible and you can move and go with it. This is again, why we recommend Infinite Banking as a general rule of thumb, because there’s much easier ways to create arbitrage, much lower interest rates.
(18:41)
And the thing is, you get paid on that money where HELOC doesn’t pay you, but at least in the infinite banking, you get paid on it and you could still arbitrage it and use it and make a lot more money that way than you would just trying to use your homemaker equity line credit and stressing about whether you’ll even be able to make your monthly payment when you invest it or if you invest in something poorly. So be aware of that, guys. Remember, again, I want the best for you. If you ever have any questions, you can always go to our website, money ripples.com, contact us right through there, guys. Make it a wonderful prosperous week. We’ll see you later.