Hey Scott,

Your numbers check out. So, not missing anything.

But, what’s important to remember is that initially, using a HELOC to pay down your student loan will reduce the interest significantly due to the large lump-sum payment toward the principal.

However, as you continue to use this strategy, the benefits diminish.

Each new HELOC draw will offer less savings.

Eventually, applying any extra funds directly to the principal becomes more cost-effective, bypassing the HELOC.

Here’s what I’m seeing in terms of savings using velocity banking through the entire loan in your example:

Total Interest Paid: $85,089.69 (Including student loan and HELOC interest).
Time: 150 months

What do you get when you enter your student loan information in a pre-payment calculator?

I have an approx $221,000 student loan at a fixed 5.5% and I have 19.6yrs left yrs to pay off. Using an amortization calculator it would take approx 21 months to take the principle 220,000 to approx $210,000; paying approx $20,818 in interest along the way since amortized loans pay interest upfront.

My bank is offering me a 10,000 HELOC at 9.4%. If I apply that today, my loan balance instantly drops to $210,000. My HELOC calculator has me paying approx $1044/mo to payoff the HELOC in approx 10mo.

According to the heloc calc Id pay a total of $427.64 interest over that 10mo.

If I subtract the $427 interest from the heloc from the 20,818 interest from the standard monthly payment on the student loan, that saves me $20,390 in interest getting my principle down to $210,000.

However, If I simply took the same $1044/mo to principle on the original loan, my principle will be down to $210000 in only approx 7 months, but Im still paying a total of $6955 of interest over the 7 months.

Now this saves me 13,863 ($20818 – $6955) of interest compared to just making the standard monthly payment, but It seems Im still saving significantly saving by going the HELOC route. $20390 saving on interest w/ heloc – $13863 saving on interest w/extra principle payment = $6527 more by going the HELOC route plus I now have the full $10000 to repeat. Am I missing something? Thank You for your time

You’re right. I’m just not sure what were the variables in the calculator we used at the time, as it’s no longer available to double check our work. We’ll need to take a deeper dive into this!

Using your example numbers of a $200,000 mortgage balance, a 3.5% interest rate on the mortgage, 30 years remaining on the term, and $1,000 positive cash flow per month.

If you put that $1,000 every month on the principal, you pay it off in 10 years and 7 months. Total interest of $39,310.37 vs. no additional principal of $123,312.18, which crushes your 17K in savings and 12 and change years.

But even if the rate was much higher, I still feel this strategy adds complexity to your financial situation and doesn’t necessarily guarantee savings or a faster payoff. Assuming the variable rates are much higher, you don’t want to lose the positive cash flow and can’t pay off the HELOC, leaving you with more debt.

Yes, it’s a variable rate. The first $40K was at 3.5%, the rest was at 4.5%.

Good question Belle.

During the HELOC draw period, most lenders only require interest-only payments on the amount borrowed. However, you have the option to pay more than the minimum payment, which would include payments towards the principal balance.

In the context of the velocity banking strategy, the whole idea is to use the HELOC to pay down the mortgage principal faster by making large, lump-sum payments. If you only make the minimum interest-only payments during the draw period, you won’t be making any progress on paying down the principal, which defeats the purpose of velocity banking.

Does that make sense?

What are the terms of the HELOC? Interest rates were low in 2021. Is it variable?

But overall, I would advise most against taking out a personal line of credit to pay off a HELOC. Personal lines of credit typically have much higher interest rates than HELOCs.

And I just don’t love juggling around debt to try to squeeze a tiny bit of potential savings, knowing that if things go wrong, you could be stuck with more debt.

You’re doing things right as they are, and if you want to focus on the HELOC, I’d just put all your free cash flow towards it.