The idea behind Velocity Banking is to use the HELOC (Home Equity Line of Credit) to pay off high-interest debt, such as credit card balances, and then pay off the HELOC more quickly than you would be able to pay off the original debt. By doing this, you can potentially save money on interest charges and pay off your debt more quickly than you would have otherwise.
Here’s how it works in practice:
- Take out a HELOC on your home, if you have sufficient equity.
- Use the HELOC funds to pay off your high-interest debt, such as credit cards, personal loans, car loans, or even your mortgage.
- Continue making the same payments you were making on the original debt, but now direct them towards paying off the HELOC.
- By making additional payments towards the principal balance of the HELOC, you can pay off the loan more quickly and potentially save money on interest charges.
It’s important to keep in mind that Velocity Banking involves using a HELOC, which is secured by your home, as collateral. This means that if you’re unable to make payments on the HELOC, you could potentially lose your home. Additionally, the interest rate on a HELOC may be variable and can change over time, which could affect your ability to save money on interest charges.
My Experience
When I learned about the Velocity banking concept, I had already finished paying off my student loans. The only loans I had were my car loan and mortgage. I used Velocity Banking to quickly pay off my 5-year car loan in just a few months. Next I used it to pay off $100,000 in principle mortgage payments from 2020 to 2022. In doing so, I saved over $100,000 in interest payments over the life of my 30-year mortgage. My goal was to finish paying off my house in a total of 5 years once I started Velocity Banking. However I stopped making HELOC chunks towards my mortgage in 2022. Why? I saved a big chunk in interest payments over the long term and my interest rate is locked in at 2.5%.
With today’s high interest rates, it made more sense to save more money in my high-yield 4.20% Betterment Cash Reserve Savings Account and invest more money in the total stock market, which has earned 8.31% year-to-date as of April 14th, 2023.
Does this mean that it is better to save or invest? The answer is more complicated than that. I just gave you my personal example. Everyone’s financial situation is different. If you have a mortgage with an interest rate higher than what your savings account pays you in interest, then you better be focusing on paying off your mortgage. This will both increase your equity in a value increasing asset and will save you in interest payments over the long term. If your mortgage is locked in at 7%, then you better stop investing or saving entirely. All of your money should go into velocity banking your mortgage so you can eventually refinance or recast your mortgage to a lower rate.
What if you have credit cards, car loans, or student loans? You are definitely paying a much higher interest rate than what you can earn with a savings account, and you may be paying more in interest than you can earn investing in the stock market. When it comes to “bad” debt like credit cards, car loans, or student loans, it is almost always worth paying them off first with Velocity banking before you attempt to save or invest.
Conclusion
Whether or not Velocity Banking makes sense in 2023 depends on your debt. Are you paying a high interest percentage when compared to what you can earn in the stock market or a savings account? If you’re considering Velocity Banking or any other financial strategy, it’s important to carefully consider the risks and benefits and consult with a financial advisor before making any decisions. If your financial advisor does not know about Velocity Banking, then you need a better financial advisor.
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