For those not subscribed, Finance Throttle started as a personal finance blog that mainly focused on the concept of Velocity Banking. Velocity Banking is a method used to pay off debt quickly and grow your net worth through investing in income properties. Using Velocity Banking, you could own up to 5 properties outright within 10 years while earning rental income on each property. It utilizes lines of credit, like a Home Equity Line of Credit (HELOC) or a Portfolio Line of Credit (PLOC) or a credit card to pay off amortized loan debt in record time, saving you thousands of dollars in student loan or mortgage interest. Sounds interesting? Subscribe here to learn more.
Swap Savings for Debt Reduction
Velocity Bankers will teach you to dump ALL of your savings into reducing your student loans or mortgage loan debt, and to use your HELOC as your emergency fund. In a savings account, your money may earn anywhere from 0.01% to 0.5%. If you use put your savings to work in paying off amortized interest debt, it can save you much more money than any savings account would earn you. Since the HELOC is calculated as simple interest, paying for a 3% HELOC will cost you less than paying for a 3% interest mortgage.
Potential Savings
Using an Amortization Schedule (Download Here), you can calculate how much money you can save by using a HELOC to pay off debt. The following depends on your mortgage terms and where you are in your mortgage pay off journey. If you borrow $12,000 from your HELOC to pay down $12,000 in mortgage principle, you will likely save over $12,000 interest in the lifetime of your 15 or 30 year mortgage. Meanwhile you will probably pay up to $30 per month in HELOC interest until you pay off the $12,000. This method is a faster and more cost effective way when compared to putting an extra $1,000 per month toward your mortgage. This is because of the amortized nature of the loan. You will always pay most of the interest up front before you start making a dent in your principle payments.
The Risks of a HELOC
While using a HELOC as an emergency fund is very feasible, it is also risky. Depending on the bank you go with, your HELOC could be available to you for 5 years or 10 years. After that, any balance becomes an amortized loan payment for a set period of time, usually 10 years. It is also possible for the bank to force you to pay back your HELOC with little notice, although this is very rare. A HELOC “call” may happen if the bank knows you lost your job or if the market is crashing badly. For me, the start of COVID and the 2020 market crash did not affect my 2.99% HELOC at all. If you are considering a HELOC, read my non-sponsored post on what I believe are the Top 5 HELOC’s of 2021.
While I am velocity banking, I don’t recommend using your HELOC as an emergency fund. I keep a 6 month emergency fund and I always make sure to never withdraw more from my HELOC than I could pay back with my emergency savings. I use my HELOC to pay for everything, but I keep my 6 month emergency fund for the true emergency of losing my HELOC at a short notice.
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