Velocity of Money and Your Mortgage
Lin Ennis
June 14, 2008
My friend Chris keeps talking about "the velocity of money." I love that term. I get excited when I hear it. It's like a secret only a select few enjoy. Some people like fast cars, fast airplanes, or fast music. Fast money is more exciting to me than any of those.
The velocity of money, simply put, is the speed at which money achieves the effect you desire - usually increasing, such as compounding wealth, but it could also be paying off a debt.
It is this principle - the velocity of money - that mortgage accelerators employ. Whether you buy a piece of software (or rent access to it) that serves as a fancy mirror to show you how well you're doing, or whether you simply focus your efforts on getting more of your money into your mortgage sooner rather than later, the scientific result is that your mortgage savings increase more the faster you apply money to the principal.
It can even be the same amount of money. Let's take $10,000 and disburse it in different ways. One person pays an extra $500 on a mortgage for 20 years. Another pays an extra $500 on the mortgage for 20 months. A third pays $1000 extra on the mortgage for 10 months. And the fourth puts an extra $10,000 on the mortgage all at once, right in the beginning. Each person added $10,000 to the mortgage principal.
What's the difference?
Velocity. The speed of money, specifically speed equity!
Assuming a $200,000 loan at 6% for 30 years, here's how the velocity of money compares on a slow to fast track, using the sample prepayment amount of $10,000 as introduced above.
Benefits Comparison of $10,000 Extra on a $200,000 Mortgage
1) pay $0 extra on mortgage; total interest: $231,670.78
2) pay $500 extra per year for 20 years; total interest: $208,050.91
3) pay $500 extra per month for first 20 months; total interest: $190,263.28
4) pay $1000 extra per month for first 10 months; total interest: $189,112.49
5) pay $10,000 extra first month; total interest: $188,048.09
Quoting Bob Ashby from Activerain,
"...by the standard rules of the velocity of money, ie Rule of 72 and others, lump sums will always outweigh a monthly contribution."
People ask me what's the point of using home equity to accelerate mortgage payoff when ultimately all the money is your money anyway? The HELOC will have to be paid back out of what you have left over at the end of the month. Why not just put the leftovers, monthly, into your home mortgage? The velocity of money is the main reason, the second reason being, once you pay it on your mortgage, you can't get it back for an emergency without a financial instrument that lets you withdraw it - a HELOC is already such an instrument.
More examples - and comparisons - of various ways to accelerate your mortgage payoff are found in an early mortgage payoff instruction manual Let your Mortgage Make You Rich!
The velocity of money, simply put, is the speed at which money achieves the effect you desire - usually increasing, such as compounding wealth, but it could also be paying off a debt.
It is this principle - the velocity of money - that mortgage accelerators employ. Whether you buy a piece of software (or rent access to it) that serves as a fancy mirror to show you how well you're doing, or whether you simply focus your efforts on getting more of your money into your mortgage sooner rather than later, the scientific result is that your mortgage savings increase more the faster you apply money to the principal.
It can even be the same amount of money. Let's take $10,000 and disburse it in different ways. One person pays an extra $500 on a mortgage for 20 years. Another pays an extra $500 on the mortgage for 20 months. A third pays $1000 extra on the mortgage for 10 months. And the fourth puts an extra $10,000 on the mortgage all at once, right in the beginning. Each person added $10,000 to the mortgage principal.
What's the difference?
Velocity. The speed of money, specifically speed equity!
Assuming a $200,000 loan at 6% for 30 years, here's how the velocity of money compares on a slow to fast track, using the sample prepayment amount of $10,000 as introduced above.
Benefits Comparison of $10,000 Extra on a $200,000 Mortgage
1) pay $0 extra on mortgage; total interest: $231,670.78
2) pay $500 extra per year for 20 years; total interest: $208,050.91
3) pay $500 extra per month for first 20 months; total interest: $190,263.28
4) pay $1000 extra per month for first 10 months; total interest: $189,112.49
5) pay $10,000 extra first month; total interest: $188,048.09
Quoting Bob Ashby from Activerain,
"...by the standard rules of the velocity of money, ie Rule of 72 and others, lump sums will always outweigh a monthly contribution."
People ask me what's the point of using home equity to accelerate mortgage payoff when ultimately all the money is your money anyway? The HELOC will have to be paid back out of what you have left over at the end of the month. Why not just put the leftovers, monthly, into your home mortgage? The velocity of money is the main reason, the second reason being, once you pay it on your mortgage, you can't get it back for an emergency without a financial instrument that lets you withdraw it - a HELOC is already such an instrument.
More examples - and comparisons - of various ways to accelerate your mortgage payoff are found in an early mortgage payoff instruction manual Let your Mortgage Make You Rich!
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