Velocity banking is becoming increasingly popular as a way to pay off mortgages more quickly. But can it truly help you save money in the long run? As is the case with many financial tactics and debt-reduction techniques, the borrower’s approach to leveraging velocity banking is the main influencer of whether it succeeds or fails. Read more to learn: What is velocity banking? How does it work? And is it beneficial?
What is Velocity Banking?
People most commonly use velocity banking as a financial planning tool that uses a home equity line of credit (HELOC) to maximize discretionary income. It can help you pay off your principal mortgage more quickly in large lump sums to sidestep amortized interest of the mortgage loan.
The idea is to use HELOC to cover expenses and pay off your mortgage faster, while diverting all positive cash flow to paying off that line of credit.
How Does Velocity Banking Work?
Instead of using a checking or savings account for purchases, a HELOC is used to pay the mortgage with all free cash flow. This account is used to deposit any bills or substantial debt payments.
It works by allowing you to take money out (a process known as chunking) and invest cash into a line of credit (LOC) just as you would with a checking account. The balance required to repay the loan increases proportionally after you complete the withdrawal.
The ideal way to take advantage of velocity banking is to first pay off loans with the highest interest, which will ideally lower the amount of interest you must pay overall.
Are There Any Disadvantages With Velocity Banking?
Many people have become interested in velocity banking, while others question if it actually helps borrowers save money. Since many banks don’t provide fixed-rate HELOCs, you’ll likely have to deal with changeable rates for your HELOC or private line of credit.
Although it will help you pay off your mortgage faster, you’ll also have to pay down the HELOC, which is essentially another debt you’ll have to juggle. And after the mortgage is paid, you’re still left with an interest-bearing loan that carries potentially fluctuating rates. So in reality, you haven’t eliminated debt. Rather, you’ve transferred debt to the HELOC.
Conclusion
While velocity banking can be highly enticing to homeowners who are looking forward to paying off mortgages, it’s not the best choice for everyone. If you’re able to get a HELOC with a fixed interest rate that’s lower than your mortgage loan’s interest rate, it could be worth considering. However, using debt to pay off debt is often not the wisest financial decision. It only conceals the reality of outstanding debt.
Before taking on an interest-accruing HELOC, be sure to do your research and consult a trusted financial advisor. Above all, seek to understand the variables at play in your specific situation to learn potential financial outcomes involved in leveraging a HELOC.
