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.
But is it as great as some say? Can you really pay off your 30-year mortgage in under 10 years, as others claim? Here are the benefits and consequences of velocity banking.
Velocity Banking and HELOC
Velocity banking, also called the HELOC strategy, is where you use a line of credit as your primary account and use monies in this account to make lump sums toward a loan, usually a mortgage. Most velocity strategies use a HELOC.The HELOC operates as your primary expense account. In other words, it is like a checking account.
How Does HELOC Work?
A HELOC is a line of credit secured by the equity in your home. You will receive a checkbook or credit card from the lender that you can use to draw on it.You borrow as needed up to the limit of credit you are given. Although a home equity loan is also based on your house’s equity, it is given to you in one lump sum.
Another difference is the interest rate. The HELOC has a variable interest rate, and a home equity loan is usually fixed. The HELOC rate as of Sept. 20, 2023, was 9.10 percent.
How Velocity Banking Works
It’s called velocity banking because it speeds up the time to completely pay your mortgage. It lets you pay the mortgage in big chunks outside your regular monthly payment.It is rather complicated, and the stars have to align to work. For example, you must have:
- a credit score over 680
- home equity
- a credit card
- positive cashflow
Velocity Formula Complicated
It takes a lot of work to carry out the velocity banking strategy. You must also be highly disciplined to pay the HELOC back. Here are the steps.- Start by opening up a HELOC. Make sure you shop around because interest rates vary. Take note that most HELOCs have variable rates.
- If you qualify for a $25,000 line of credit, pay $22,000 toward your mortgage. This is called “chunking.” Leave $2,000 in it for emergencies.
- This is where the banking comes into play; you will be using the HELOC as if it were a checking account. When you’re paid at the beginning of the month, you put your whole paycheck (for example, $6,000) in the HELOC. It’s called “parking your paycheck.” This will pay down the balance.
- Throughout the month, pay all your expenses with a credit card.
- Once a month, pay the credit card balances from the parked paycheck in your HELOC and your monthly mortgage.
- If your expenses are $5,000, the $1,000 left over after paying all your expenses will help pay down the HELOC balance. Once you’ve done this, start the process over. After a year, you will have enough funds in your HELOC to make another chunk payment on your mortgage.
Negative Cashflow a Problem
The whole premise of velocity banking is that you have a positive cash flow. If you spend more than you make monthly, you cannot do velocity banking.Trading Debt for Debt
When you take out a HELOC, you’re taking out more debt to pay debt. You’ll have the mortgage to pay off, but you’ll also have to pay off the HELOC.
Even if you’ve successfully paid off your house in 10 or fewer years, you'll still have a high-interest line of credit to contend with.
HELOC’s Higher Interest Rate
You’re taking out a line of credit with an average 9.10 percent rate to pay off a mortgage with a lower interest rate. The average 30-year mortgage rate is 7.42 percent, as of September 2023, and they are usually fixed. Older mortgages have interest rates of around 3 percent.You also must keep in mind that HELOC interest rates are variable. So as inflation goes up, so can your interest rate. If you’re a betting person and don’t mind risk, the rate also has the potential to go down.
Credit Score Affected
You have to have a solid credit score to qualify for a HELOC. But, ironically, you’ll end up with a lower credit score if you have a HELOC.Every time you use the credit from a HELOC, your credit score will dip. And with the velocity banking formula, you will be using it monthly.
Should Velocity Banking Be Used?
You must be highly disciplined to use the velocity banking method. You also must have positive cash flow.It’s a complicated process to go through continuously. The better solution may be to make an extra payment on your mortgage monthly.
The Epoch Times copyright © 2023. 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.
