On ‘velocity banking’

I recently answered this question.

Is anyone doing this? Has anyone gotten into the mathematical weeds on this? If you’re not familiar with velocity banking here’s a video that explains it, more or less.

Yes.

It’s just a silly gimmick.

The basic underlying assumption is that at all times you hold as much of your debt as you can in an account that has the lowest interest rate at the moment. That’s all.

For example, there is a piece of gymnastics where you hold your debt for a limited time on your credit card, because credit cards have a grace period of about 30 days with effectively 0% interest rate.

So for a limited time, a CC becomes the “best” place to store this. But you must move your debt to elsewhere before the grace period expires, lest you start paying 24% interest. And a HELOC account is usually the next easiest lowest interest

It may make sense for folks who routinely keep debt on a credit card, and those who have issues with the discipline to pay off their mortgage.

But for folks who have enough cash to cover all of this, it is just a silly gimmick.

Also if it’s an investment property, you don’t care about building equity.

If you care about your payments, then take an interest-only loan.

I am not sure why velocity banking is so popular on youtube. Perhaps people hope to sell courses on the approach?

Ah, yes, one question remained unanswered: how does it help you pay off your mortgage earlier? (one of the stated benefits of velocity banking)

By advising you to pay off lots of additional principal each month beyond the minimum payment.

All the other machinations they advise are just obscuring that basic fact.

Again, something that you can do easily if you have cash.

Pay more towards the principal each month.

Or what the hell, just pay cash for the property to begin with.

(Incidentally - paying extra $100 of principal is equivalent to investing the same $100 for a risk free return equaling your loan’s APY, for the lifetime of the loan.If your mortgage is 2.5%, you are probably better off investing $100 in something else, as even the risk-free return is higher today.)

So, again, it’s a silly gimmick.

For some weird reason presented in a really confusing way.