Velocity Banking Explained: How HELOCs Can Replace Your Mortgage Strategy

Joel Cabusao (00:00)
there’s companies like CMG Lending as well as The Loan Store that have specific products that occupy the first lien. Now don’t— those aren’t the only products, but the purpose of the first lien is to turn amortized funds into simple interest funds. Now I don’t mean to be too technical. Basically, you use a home equity line of credit as a checking account. And you know, if you’re a good income— income earner after your expenses, leftover money per month is applied towards principal. Principle first and not interest first.

Dylan Silver (02:06)
Hey folks, welcome back to the show. Today we’re joined by Joel Cabusao, a lending and capital advisory professional in Chicago with Barrett Financial, helping real estate investors and business owners secure financing solutions across a wide range of asset types and investment strategies. Joel, welcome to the show today.

Joel Cabusao (02:27)
Thank you, Dylan. It’s a pleasure to be here.

Dylan Silver (02:29)
Now we were talking in the green room about a specific type of creative banking, velocity banking. How is this strategy being utilized today?

Joel Cabusao (02:41)
Well, you know, there’s companies like CMG Lending as well as The Loan Store that have specific products that occupy the first lien. Now don’t— those aren’t the only products, but the purpose of the first lien is to turn amortized funds into simple interest funds. Now I don’t mean to be too technical. Basically, you use a home equity line of credit as a checking account. And you know, if you’re a good income— income earner after your expenses, leftover money per month is applied towards principal. Principle first and not interest first. If you take your interest rate for today, I do rate updates every single day on my YouTube channel, but it’s about 6.6% today for the average 30-year fix. and you basically— those are amortized funds. And the thing is, if you take that particular loan and— and it being a 30-year fix, you’ll find that it’s like hundreds of thousands interest that you pay at the end of 30 years. I have models that I can produce where if you use velocity banking, you could actually take an eight percent simple interest loan and save yourself hundreds of thousands of dollars and the effective rate will be somewhere below four percent.

Dylan Silver (03:58)
Now I don’t want to give away all the gold, right? But let’s give away a nugget here. If folks are trying to understand on a granular level how this looks, is it making larger payments up front? What’s the secret sauce here?

Joel Cabusao (04:12)
Think— I think a lot of people think that way because they think to themselves, “Well, why can’t I just make overpayments?” And that’s true. If you have an interest rate from 2020 and you have a 2.5%, certainly make overpayments because at the— that point, velocity banking doesn’t make sense. If you want— your goal is to pay off your mortgage, you know, right away in five to seven years instead of 30. But if you have a 7.5% rate from 2022, this is the right product for you. Now you have to be a good income earner. And the benefit to this particular product is that it doesn’t change the way you live. Imagine if you had a first lien HELOC instead of a 30-year fixed mortgage. You— HELOCs are typically interest only, and you’re depositing your— the entirety of your income into your first lien HELOC, and you have access through a debit card, checking account, online access, and you pay your bills from that account. It’s FDIC insured, so you’re not gonna lose your money at all. But at the same time, you’re gonna have access to like a large amount of availability. And you should be aware of this because this account is not for the financially irresponsible. But if you treat that account right, the extra, extra money that you have per month will be applied as principal. And so that is the overpayment right there. But because this account calculates interest on a nightly basis, every time you make a deposit or even spend a little, it’s— it’s at that particular balance. As opposed to a 30-year fixed, it’s a fixed payment for however long until you refinance.

Dylan Silver (06:45)
So this is a different type of product that you could use to finance a home.

Joel Cabusao (06:50)
Yes, but not only finance a home, build your equity, but also use that equity to purchase investment properties. And not a lot of people know. Let’s say if you take a chunk out of your home equity line of credit and put it as a down payment— now consult a CPA in your area, you know, about because what I’m about to say is— is somewhat controversial, but that— those funds are tax deductible. And you know, you could put that 25% and use your home equity line of credit as reserves. I’m not sure if the audience knows what reserves is, is— but it’s the monthly payment of any loan times six months, you know, to pa— have in liquid funds aside— aside from the actual account. But you could actually put 25% down or even 20% down if you’re working with me, you know, and you— you have that experience. But you could do that and purchase that property using your home equity funds and then use velocity banking to pay off your— your owner-occupied property that you have this first lien on, and then use it to pay off the other properties as well, or turn the investment properties into all-in-one properties as well, in order to continue that cycle. Like for my brother, he’s done the same thing, and it’s like an ecosystem. Yeah, him and his wife’s pay goes into one account. It— you know, he’s paying the— the mortgage from his investment properties. the income from, you know, his rentals are going to his main account and paying off his amortized debt fast. He’s got two years left on his mortgage and he’s saving himself w— hundreds of thousands of dollars.

Dylan Silver (08:41)
Now, in order to utilize velocity banking account, to have this type of account set up, would you have to be having a certain income coming in per month, monthly, or is this something where, you know, if you have a large windfall of cash that it would make sense there as well?

Joel Cabusao (09:00)
Well, you do have to qualify, you know, for example, the first lien HELOC on the conventional side at the very least. Cause I do have a DSCR HELOC that’s first lien, but that is mainly on the property itself. For the conventional first lien HELOC, the minimum credit score is 720, 43% DTI, requiring at least ten to twenty percent reserves, depending on the situation. bank statements are allowed. But, you know, aside from that, you know, it would depend on your situation and the size of your loan, but it’s usually good for people that have disposable income per month.

Dylan Silver (09:44)
Okay, okay. I wanna get a little granular here if we can, talking about some of the differences ’cause I hear some of these terms and I w— I wanna see are they interchangeable or are they distinct? You mentioned HELOC, velocity banking. Where do these tools really intermesh and where— what are the differences between, you know, someone using a HELOC and velocity banking?

Joel Cabusao (10:07)
Well, a HELOC is just the name of the product, the home equity line of credit. It could be a standalone product that occupies the second lien or be the first lien on a property. Velocity banking is a method. If you choose to employ it, you know, it’s actually taking your— your paycheck and putting the whole thing into the home equity line of credit and paying your bills out of it using the home equity line of credit as a checking account. So the HELOC is a product and velocity banking is the way.

Dylan Silver (11:12)
I got it. I got it. Now, you mentioned earlier about the tie-in for investors here. And I know that there’s a lot of folks that have equity in their homes, but they may be hesitant about tapping into that for a second property because they’re worried about the ramifications and paying interest on equity. For folks who may not be familiar with this, how do you break down, you know, the advantages and maybe some of the risks, if there are any, to a HELOC?

Joel Cabusao (11:39)
Well, there’s definitely risks, like I mentioned earlier, if you’re financially irresponsible and you spend all the equity that you have on whatever you want. I know some people like that. You know, so— you know, that is a risk because you’re gonna have all this of availability to you. Taking money out of your equity is a risk. Now, you know, depending on what that interest is for that home equity and the interest rate for the new property, we could calculate what the break-even point looks like. But then again, you know, the tax deductive— deductibility, you know, that’s something you’ve discussed with your CPA. Also for like financial advisors, sometimes they could save money on that same amount. Maybe it’s a fix and flip situation, and you know, you need that down payment for the home equity line of credit that— or down payment funds to repay those money that you spent on the home equity line of credit. And you could earn like a larger, more aggressive, you know, earnings, but you— you’d have to talk to your financial advisor, of course. But also there’s a benefit where like my brother, what he does is genius. He takes a travel card and then pays his bills on the travel card and then before the interest posts on the 21st, pays it off with his home equity, earns the travel points, and never pays interest on that credit card. Yeah. So it’s— it’s a great product. You know, there’s different ways to use the home equity line of credit, and that’s why I love it. And a lot— that’s why, you know, banks really won’t tell you this because they want to earn money, right? The— the amount that they make on a 30-year fix is insane. It’s necessary— I’m not bashing the 30-year fixed, but I’m just saying that there’s a way to structure it appropriately, not to necessarily guarantee peace of mind, but certainly build a strategy— strategy towards it.

Dylan Silver (13:43)
Now, at what point would you say, you know, velocity banking is applicable for someone who’s a first-time homeowner? It’s gonna be when they have equity in their home. Is that accurate?

Joel Cabusao (13:52)
Well, if you’re a first-time home buyer, you could— you could definitely consider this. But the thing is, is that if you— if you’re going with either one of those two lenders I mentioned earlier, you’re gonna need at least 10% down. You know, 10% down plus reserves, you know, to qualify for the loan. But it could be a goal if let’s say if you don’t have that down payment, we— I could provide a 3.5% you know, down FHA with down payment assistance. I’m not really a huge fan of the FHA loan. If— if— if you have to, you, you, you can, but you know, it’s just that MIP that sort of bothers me, the mortgage insurance protection that lasts throughout the life of the loan. You know, you’d have to measure that out between that and your interest rate. But and then there’s five percent down for conventional loans. Now, the great thing about conventional loans, and if you know the borrower can put 10% down and doesn’t necessarily want to do a first lien home equity, or maybe you don’t qualify for it, we could do something called an 80-10-10. 80% first, conventional, 10% second, 10%, you know, of their own funds. Now they could employ velocity banking with the second lien. It’s a process called chunking, you know, taking much of the amortized debt and then putting into the home equity line slowly. It— it does the same thing as as the first lien HELOC. Now, you know, that’s— that’s something that— that is complicated and you would have to do on a schedule. There’s— there’s calculators that I have that if you’re in that situation that you could employ and you know start doing this. And you know, I— I— I have a handful of customers that have done that, you know, as first-hand time— hand first-time buyers, but typically, you know, that is something that we would have to investigate just to make sure that it could break even in terms of the fees cause there’s fees for the second as well.

Dylan Silver (16:39)
Now, when folks are looking at getting into an equity position as soon as possible, of course, putting more money down is going to solve a lot of issues, right? But then they also have to, I’m sure, look at, well, okay, well, how much of our savings is this? And if we put all this down, how much do we have left over for, you know, who knows what could happen? The flip side to that is, well, if you have equity in the home, then you’ll have access to the HELOC, right? So what’s your feedback when folks are trying to decide, well, I should I put 5%? Should I put 10%? How much should I put down?

Joel Cabusao (17:09)
Well, if— if you’re putting 10% down, then talk to me about a second piggyback, a second loan. Because then what we’ll do is have the first mortgage at 80% to avoid PMI, and then then you know, you’re a 10% second, which is home equity line of credit for the purposes of velocity banking, and then your 10% of your own funds. Now, if it’s five percent, then we talk about, you know, options like maybe buying down the interest rate to get you in a better equity position, but be careful of swindlers. You know, so I had a client that showed me a loan estimate, and the loan officer told— told them, I could get you this five percent rate. And they— they came to me and said, “You know, can you match this? Like, do you want me to match this?” It’s 15 grand cost for the rate. And lot of people don’t realize that that’s not how rates work. You know, you know, a lot of people say, “You know, they— they offered me a half a point cheaper.” How much did it cost? You know, because that’s how you should measure rates. What is the 6.5 rate at? What cost is that? Is it a credit or a cost? And so, you know, this customer had a 15,000— I did a video about this— $15,000 cost. It would take them three years to— to recoup that— that money. And so when it comes to conventional loans, you got to measure that. And you know, I work with 200 lenders. It’s— it’s wholesale, so I’m gonna come in at least an eighth or a quarter below the average rate.

Dylan Silver (19:00)
Now when people are trying to calculate the cost of their loan, where can that information be found?

Joel Cabusao (19:07)
Well, the easiest way, AI. You know, seriously. You know, we have so many tools at our disposal right now. You don’t even have to go to a mortgage calculator. You could use— I mean, my favorite’s Claude, because it— it spits out beautiful reports. That’s how I do my proposals, you know, with— with Claude, you know, because it spits out— it spits it out beautifully. But you know, I— I have my website, JoelTheMortgageGuide.com. I do have a mortgage calculator and I do have, which AI doesn’t have this, the all-in-one calculator. And you can literally put information on the all-in-one calculator and it’ll show you how much you’re saving with velocity banking.

Dylan Silver (19:54)
Now, when folks are looking at investment opportunities and they’re comparing asset classes, they’re trying to determine, hey, do I want to go short term rental, midterm, long term? Do I want to go into, you know, small multifamily, or do I want to go into a larger multifamily? I know we were talking in the green room, lots of commercial experience. When folks are trying to weigh different asset classes and there may be newer investors, any feedback for those folks?

Joel Cabusao (20:24)
Yes. So I— I talk about this. I ri— should really pin my videos on my YouTube channel. But I talk about this on my YouTube channel about with new investors, experience, first of all. You know, you could have like five thousand dollars in the bank and a 750 credit score, but will it be worth— of worth it to you to put down thirty percent on an investment loan or you know, thirty percent on a fix and flip loan? So networking is key. Networking should be a base for everybody, getting to know people, even introverts, you know, if you really want to level up, you know, your— your income. So what you’re looking for is people with experience. Generally, the— the for fix and flips, generally the requirement is three flips within the past two years. So in my experience, you know, when it comes to not only you know long-term rentals and short term, but fix and flips, it’s all about location. And, you know, for example, here in Chicago, this is very interesting because one of my realtors did this. He had an investment property next to the Renaissance in Schaumburg, Illinois. Now, people wouldn’t typically think that Schaumburg is a place to have a rental property, although it’s— it was by the Renaissance, which is a hotel that receives a lot of travelers for business. It’s a perfect place. We’re talking about net five grand a month. That— that particular— it’s a single family ranch— ranch home with a pool. So it— if you could think strategically about that, you know, if it’s by a school, excuse me, if it’s by, you know, a hospital. Especially if you could talk to the hospital about like housing, you know, for nurses, for traveling nurses, you know, try to get to that angle. my brother has an investment property by NIU, Northern Illinois University, and he gets his— his flow of renters from there. So it’s gotta be strategic and it’s gotta be intentional.

Dylan Silver (22:35)
You know, the location you mentioned is is so important. And one of the things that I think sometimes gets missed in this is when folks are juggling financing with you know expected profits from a deal and they’re looking at their past performance of certain projects, you can sometimes miss that just going one street over even can be different comps entirely. I’ve seen this happen time and time again. We just see a property, we’re in different markets, but Chicago this— the same theory applies. Just one street over and a property can sit or not bring the same types of returns as you would have thought going into it.

Joel Cabusao (23:11)
Yes, and— and I don’t know how close you are to the DFW. I know that you’re from Texas.

Dylan Silver (23:16)
Yeah, I— I used to live in— in Denton, just north of what that is considered DFW.

Joel Cabusao (23:20)
Yeah. And— and you know, there was a few properties because I have a couple of realtors in— in Texas. And there’s one of my real— realtors, Arlene, she’s phenomenal, you know, in terms of, you know, finding properties for her clients because she knows the— the history of the foundation or she was explaining this to me. I don’t recall exactly what she was saying. But, you know, and that’s important in terms of location, you know, is— is longevity. But there were— I don’t know, you tell if this is true. There was, I believe, a Universal Studios that was being built like around there.

Dylan Silver (23:56)
I believe yeah, it’s a Universal Studios or a Disneyland, one of the two, I keep hearing this, it’s shocking, right? But of course they’ve got the stock exchange that’s gonna be opening up and I believe DFW as well and so if you look at everything that’s coming into Texas, it seems like the eyes of corporations and of entertainment and— and sports certainly and of real estate absolutely is in Texas. We are coming up on time here actually, Joel. Any new projects that— that you’re working on and then also anything you’d like to mention directly to our audience.

Joel Cabusao (24:36)
Okay, well, I am working in terms of projects— I mean, my ongoing project of improving my YouTube channel. if the audience would be so kind to subscribe, you know, I— and— and comment on what they would like to talk about, because sometimes I talk so high level that you know it really goes pi— past people’s heads. But I’d like to really break that down granular, as you say. and also, you know, in terms of projects I’m working on, in terms of like clients, I mean, I’m working on a multi-unit— several multi-unit deals. If you’d like to— to get involved with multi-unit deals, you know, in my opinion, in with my networking, the Midwest is hot. I’m talking about Chicago. I’m talking about Cincinnati, Ohio. There’s different reasons why you want to invest in those markets because, you know, their— their chuck with availability in— in multi-units— not necessarily Chicago, more Cincinnati, but Chicago does have some gems, you know, that are up and coming, even outside the area of Chicago. But I want people to, you know, I want to help people learn about like investing, or if they’re a first-time home buyer, you know, how they could level up their investing game or you know, any education that could provide as— as it calls with my twenty years of experience.

Dylan Silver (26:07)
Joel, thank you so much for your time today. Thanks for joining—

Joel Cabusao (26:10)
No problem. Love the conversation.