Velocity Banking is a financial strategy that involves using a line of credit to pay off debts quickly and efficiently.
Velocity banking is all over the internet. And self-proclaimed financial experts on YouTube are touting its benefits. It’s a way to use a home equity line of credit (HELOC) to pay off your mortgage early. On paper, it looks great.
Velocity banking has taken the internet by storm, with self-proclaimed financial gurus on YouTube singing its praises. This strategy involves using a home equity line of credit (HELOC) to pay off your mortgage ahead of schedule. At first glance, it seems like a fantastic idea.
But is it really as amazing as it’s made out to be? Can you truly eliminate your 30-year mortgage in less than 10 years, as some claim? Let’s delve into the advantages and consequences of velocity banking.
Velocity Banking and HELOC
Velocity banking, also known as the HELOC strategy, revolves around utilizing a line of credit as your primary account and using the funds in this account to make large payments towards a loan, typically a mortgage. Most velocity strategies involve a HELOC.
The HELOC functions as your main expense account, similar to a checking account.
How Does HELOC Work?
A HELOC is a line of credit secured by the equity in your home. The lender provides you with a checkbook or credit card that you can use to access the funds.
You can borrow from the HELOC up to the credit limit you are given. While a home equity loan is also based on your home’s equity, it is provided to you as a lump sum.
Another distinction is the interest rate. HELOCs have variable interest rates, whereas home equity loans are typically fixed. As of September 20, 2023, the HELOC rate stands at 9.10 percent.
How Velocity Banking Works
Velocity banking gets its name from its ability to accelerate the mortgage repayment process. It allows you to make substantial payments towards your mortgage outside of your regular monthly installments.
However, it is a rather complex strategy that requires everything to align perfectly in order to be effective. For instance, you need to meet the following criteria:
- a credit score over 680
- home equity
- a credit card
- positive cashflow
You must have sufficient equity in your home to qualify, and the more equity you have, the larger your credit line will be.
Velocity Formula Complicated
Implementing the velocity banking strategy requires significant effort and discipline to repay the HELOC. Here are the steps involved:
- Start by opening a HELOC, ensuring you compare interest rates as they can vary. Note that most HELOCs have variable rates.
- If you qualify for a $25,000 line of credit, allocate $22,000 towards your mortgage. This is known as “chunking.” Leave $2,000 in the HELOC for emergencies.
- Now comes the banking aspect; you will use the HELOC as if it were a checking account. At the beginning of the month when you receive your paycheck (let’s say $6,000), deposit the entire amount into the HELOC. This is referred to as “parking your paycheck,” and it helps reduce the balance.
- Throughout the month, cover all your expenses using a credit card.
- Once a month, use the parked paycheck in your HELOC to pay off the credit card balances and your monthly mortgage.
- If your expenses amount to $5,000, the remaining $1,000 after paying all your expenses will contribute to reducing the HELOC balance. Once you’ve accomplished this, restart the process. After a year, you will have enough funds in your HELOC to make another chunk payment towards your mortgage.
It can be confusing and demanding, but there are downsides to using a HELOC to pay off your mortgage.
Negative Cashflow a Problem
The fundamental premise of velocity banking is having a positive cash flow. If you consistently spend more than you earn each month, velocity banking is not feasible.
Trading Debt for Debt
When you obtain a HELOC, you are essentially taking on additional debt to pay off existing debt. While you will have your mortgage to repay, you will also be responsible for the HELOC.
Even if you successfully pay off your house in 10 years or less, you will still have a high-interest line of credit to contend with.
HELOC’s Higher Interest Rate
By opting for a line of credit with an average interest rate of 9.10 percent, you are using it to pay off a mortgage with a lower interest rate. As of September 2023, the average 30-year mortgage rate is 7.42 percent, and these rates are typically fixed. Older mortgages may have rates around 3 percent.
It’s important to note that HELOC interest rates are variable. As inflation rises, your interest rate may increase as well. However, if you’re willing to take risks and enjoy gambling, the rate also has the potential to decrease.
Credit Score Affected
To qualify for a HELOC, you need a solid credit score. Ironically, having a HELOC can actually lower your credit score.
Each time you utilize the credit from a HELOC, your credit score will take a hit. And with the velocity banking formula, you will be using it on a monthly basis.
Should Velocity Banking Be Used?
Implementing the velocity banking method requires a high level of discipline and positive cash flow.
It’s a complex and continuous process to go through. A better alternative may be to make extra monthly payments towards your mortgage.
The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
Carefully considering your personal financial situation and goals can you determine if velocity banking is right for you. Is velocity banking a suitable strategy for homeowners with limited equity in their homes? Can homeowners with variable interest rates still benefit from velocity banking? How can homeowners effectively manage their cash flow while using velocity banking
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