What is velocity banking? Operation, advantages and disadvantages

If you need pay off your home loan quickly, the velocity banking could be an excellent strategy for you. Think that, when you acquire a mortgage, you spend many years of your life paying the minimum monthly payment. What does this mean? That you will end up assuming a high cost, at least if you consider the amount of interest that will be generated over 10, 20 or 30 years.

Fortunately, you will be able to get rid of a large part of the mortgage interest with a “refund strategy”. HELOC”, something known as velocity banking. Through this mechanism, you will be able to make lump-sum payments frequently and, therefore, reduce the amount of interest.

But,what is it velocity banking? How does it work? Does it represent an advantage or, on the contrary, does it generate a problem of great proportions? Join us to study it and discover it with us.

What is it velocity banking?

The “HELOC strategy” or velocity banking is, despite popular belief, a fairly simple concept. It involves opening a home equity line of credit (HELOC or Home Equity Line Of Credit) and turning it into your primary checking account. What does this mean? That all your income will be deposited in this account and, through it, you will make your monthly payments.

when you open your HELOC, you can make a global payment of your mortgage almost instantly. This lump sum payment must not exceed the HELOC limit. By doing this, you will be able to reduce your debt (principal + interest) and not just once, since you will be able to repeat the same operation every time you receive income.

What is the idea of velocity banking? That the extra money that you may have left each month go directly to the HELOC thus reducing the debt because both the frequency of payments and the amount of the payment itself will be made according to your economic possibilities and not taking into account the minimum fee established in the home loan that you acquired

How does the velocity banking?

To understand the velocity banking in its entirety, let’s see how it works in an example. Suppose you bought a $100,000 mortgage subject to 5% interest rate. Your real estate has a value of $125,000 according to the last appraisal carried out, which means that you have an extra $25,000 of capital. Your monthly income is estimated at approximately $4,000, while your expenses – which include the mortgage payment of $567 – amount to $3,000. This means you have free cash flow of about $1,000 left..

Now, in order to pay off your mortgage quickly, let’s say you go for a HELOC strategy. When you open your HELOC, the financial institution will issue you a debit card and checkbook, just like any checking account. Of course, when doing this you will need to set up this HELOC account as your primary payment account. Therefore, you will have to talk to your employer so that your income is deposited in this account and not in any other.

Most financial institutions calculate the HELOC at 90% of the value of your real estate. Following the example data, the bank would take the appraised value of your real estate -which is $125,000- and apply 90% to it, converting it to $112,500. Since your mortgage debt is $100,000, you will have to do a simple subtraction to know what the amount that the bank will approve for your HELOC will be., which, in this case, would be $112,500 – $100,000 = $12,500 at 7% APR.

Remember: Based on the example, your income is $4,000, while your monthly expenses remain close to $3,000. Therefore, you will have a free amount of about $1,000 that you can use to advance your mortgage payment.

So far, everything is clear: you established a velocity banking to pay your mortgage and you will use this account as your checking account. Once everything is set up, Let’s say you make a principal payment on your primary mortgage of $6,000.. When this payment becomes effective, then your mortgage will no longer be $100,000 but will be $94,000.

Afterwards, you will continue to make your usual monthly payments, that is, the payment of services and basic goods and your mortgage, which is $567. In the meantime, you will incur some interest expense on both the HELOC and the mortgage and will have to wait an additional 6 months to have the $6,000 HELOC line of credit available again.

Right there you will make another balloon payment on your mortgage for $6,000. Although you can’t see it now, you are paying your mortgage in record time. See how your mortgage payment goes down every time you make a balloon payment:

Relationship table with the first balloon payment of $6,000

mortgage balance $94,000
HELOC $6,000
Total $100,000

Table of relationship with the second balloon payment of $6,000

mortgage balance $86,783
HELOC $6,124
Total $92,907

(+$7,093) 7.09% paid

If you keep doing the same thing for about two and a half years, you will end up with a much lower balance than you would get by paying the monthly mortgage payment alone. So, in the third year, you would have a balance like this:

mortgage balance $55,017
HELOC $6,819
Total $61,836

(+$38,164) 38.16% paid

Three years and two months after implementing the velocity banking, you would no longer need to use the HELOC, and three months after that, you will have already paid your mortgage in full.

Note that, following the example, it only took you a total of 77 months or, what is the same, 6 years and 5 months to pay off your mortgage. Doing it this way, you will only pay $17,468.37 in interest. This is the advantage of velocity banking or HELOC strategy.

Remember: The best part of making use of the velocity banking strategy is that the HELOC will allow you to access the capital you need to accelerate your mortgage payment easily and quickly.

Advantages and disadvantages of velocity banking

Although the velocity banking seems like a great way to pay off your mortgage quickly, is subject to a set of rules and obligations that you must follow in order to obtain the expected result. That is why we think that, before jumping into the water, you should evaluate its advantages and disadvantages. This will allow you to make the best decision:

Pros of velocity banking

  • It allows you to pay off your mortgage quickly. The velocity banking it is one of the best strategies that a person can implement to pay off their mortgage quickly. Think that, instead of making minimum payments, you can use the HELOC money to improve your financial situation and pay off your mortgage in full in record time.
  • You will have extra capital to make payments. Although mortgages are not designed to take advantage of extra principal – that is, that money you get monthly that you could use to reduce the balance of the loan – a HELOC combined with the velocity banking It will allow you to use that money and thus simplify the payment of the mortgage loan.
  • You will pay less in interest. As this strategy requires you to use that free cash flow that you have left from month to month, the duration of the mortgage will be significantly shortened. This will make the compound interest generated much lower and, therefore, you will be saving money in the future.
  • Gives you access to cash. With an approved HELOC, you can not only reduce your mortgage. You can also access the money in case you need it. For example, if you have an unexpected expense -such as vehicle repair- you can easily cover it.

Cons of velocity banking

  • The HELOC works with adjustable rates. It does not happen in all banks, but some institutions do not work with fixed but variable rates. This could create a bit of uncertainty when applying for the HELOC because you do not know for sure what the rate that will be applied to you in the future will be.
  • you need credit score. In order to qualify for a HELOC, you need to have a good credit score. Therefore, it is possible that if you do not have a good score, you have to improve it first or find a bank that is more flexible in granting the HELOC.
  • Requires free cash flow. The velocity banking it is a strategy that requires the user to use the extra money to pay the outstanding balance of their mortgage. If you lack additional income, you may not be able to apply this strategy.
  • The appraised value may not match the mortgage balance. When requesting a HELOC, the bank will analyze the value of your real estate. Sometimes, if the real estate market has been down, your appraisal may be lower than your mortgage balance.
  • There are many scams on the internet. An analysis conducted by Google determined that there are many scams trying to sell courses, tools and strategies for quick mortgage payment. It is important that you do not fall for these types of scams that are usually handled through an MLM scheme. What does this mean? What to offer you velocity banking They will ask you, for example, for a monthly payment. Protect your money and request your HELOC in reliable institutions! The velocity banking it is free and no bank or financial institution will ask you for money to give it to you.

Should I use the velocity banking?

This is at your discretion. However, take into account that the velocity banking is not an ideal strategy for people who have a mortgage subject to a very attractive interest rate, at least one lower than if you added the interest generated by the mortgage APR and the HELOC. Perhaps this strategy is not necessary either in case your income allows you to successfully assume economic problems in the future, such as home repairs or an unexpected payment.

If you do not have savings or extra income, it could also be said that the velocity banking it’s not for you because you will need to have a positive cash flow to be able to make balloon payments.

Remember: Use the velocity banking It is not the fastest way to pay off your mortgage, but it is one of many. Arguably the easiest and fastest way to pay off a mortgage loan is to make additional payments equal to the money you have left free each month., especially if it is high because this would allow you to save and, at the same time, allocate a large part of the surplus to the global payment of the credit.

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