My favorite way to pay off debt fast is to use Velocity Banking. It is a little known but powerful strategy used to eliminate your debt while saving thousands in interest payments. In fact, you can pay off your mortgage in as little as 5-7 years while saving over $100,000 in interest payments using Velocity Banking.
WE STARTED OUR VELOCITY BANKING JOURNEY WITH A $282,000 LOAN ON JANUARY 2019. WE ARE ON TRACK TO PAY OFF OUR MORTGAGE BY 2026. JUST 7 YEARS!!!
Loan VS Line of Credit
A Loan is a lump sum of money you borrow and pay back in fixed payments over a fixed term. Loans are charged amortized interest where you pay most of the interest up front. Examples of loans include Mortgages, Student Loans, Home Equity Loans, Car Loans, and Personal Loans. The interest on a loan is based on the ending balance of the loan at each period, or month.
The Formula for Calculating Loan Interest is:
(Ending Monthly Balance x Interest Rate) / 12 Months
A Line of Credit (LOC) is a revolving account that lets users draw, pay, and draw again. Lines of credits are charged simple interest where you are charged interest on your average daily balance. Examples of Lines of Credit include credit cards, home equity lines of credit, and portfolio lines of credit.
The Formula for Calculating LOC Interest is:
Average Daily Balance x (Interest Rate / 365 Days)
With a LOC, your monthly interest due will be based on the average daily balance over the month.
What is Velocity Banking?
Velocity Banking is a strategy where you use a revolving line of credit as your primary checking account to help pay off your student loans or mortgage. In this strategy, you use your line of credit to pay off a huge lump sum of your loan. Using your line of credit as your primary checking account helps you use your extra cashflow towards paying down your debt so you can “chunk” another lump sum towards your principle. Check out the diagram below to help you learn how this works.
Leveraging Debt
Velocity Banking Leverages LOC Debt to pay off Loan Debt. As weird as it sounds, you are borrowing money to save money. The earlier you are in your loan pay off journey, the higher the benefit of using Velocity Banking. Most people won’t have $5000, $10,000, or $20,000 to put towards their principal each year. That’s where using your Line of Credit comes into play. You can keep your 6 month emergency savings and borrow that $10,000 to chunk into your loan principal.
Some of the wealthy take it a step further by using their Lines of Credit to Invest in the stock market. This only works when rates are low and the economy is doing well. They pay a 3-5% interest rate on their home equity line of credit to make 10-15% in the stock market, profiting the difference.
VELOCITY BANKING LUMP SUMS IS BETTER THAN MAKING EXTRA MONTHLY PAYMENTS BECAUSE LOAN INTEREST IS CALCULATED ON MONTHLY ENDING BALANCES. YOU WILL PAY MORE INTEREST WITH AN EXTRA $500 PER MONTH COMPARED TO PAYING $6,000 NOW AND $6,000 AGAIN 12 MONTHS LATER.
To Summarize
Velocity banking is a very effective method in paying your debt (mortgage, loans, credit cards) in record time. If you have a large amount of savings that allows you to take $15,000 and put in into your mortgage now, then do it now. Just make sure you don’t pull from your 6 month emergency savings account. When you save that $15,000 back up, put it in your principle again. If you don’t have the money to put a large chunk into your principle, then apply for a 0% interest introductory MasterCard credit card or even better if you own a home, apply for a home equity line of credit. I mentioned MasterCard because VISA does not allow you to “Balance Transfer” a lump sum of your mortgage onto their credit cards.
NEED TO PAY A BILL? USE YOUR LINE OF CREDIT.
GOT YOUR PAYCHECK? PAY DOWN YOUR LINE OF CREDIT WITH YOUR ENTIRE PAYCHECK.
Pro Tip: Using a Home Equity Line of Credit (HELOC) as a checking account is easy if you have your HELOC and your checking account with the same bank. That is because you can instantly transfer money between your line of credit and checking account without waiting two to five business days. Keeping your average daily balance down will minimize interest payments and maximize savings.
This page is a high level summary on how velocity banking helps you pay off debt fast. There are other use cases and benefits, but also a few risks to consider when velocity banking.
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