Before I get into this, I should explain that I have been using the velocity banking method for 1 year now, and it has already shaved off 11 years and over $54,000 of interest from my mortgage. IT WORKS!! I plan to be done paying off my new house by 2026.
To explain velocity banking, I have to explain the basics. A loan is a lump sum of money you borrow and pay back over a fixed term. It is usually charged amortized interest, where you pay most of the interest in the 1st half of the term before you start paying off your principle. Examples of loans include Mortgages, Student Loans, Home Equity Loans, and Car Loans. A line of credit is a revolving account that lets users draw, pay, and draw again. Lines of credits are usually charged simple interest. Examples of Lines of Credit include credit cards and home equity line of credits.
With loans vs lines of credit out of the way, we can explain velocity banking. Let’s use a 30 year, 3% interest, $250,000 mortgage as an example. To pay off your 30 year mortgage in 5-10 years, your options are to pay additional principle each month, or use the velocity banking “chunking” method.
Let’s assume you are able to save $500 per month. You decide to put that $500 per month in your principle payments of your mortgage. If you pay the extra $500 for the length of your entire mortgage, you will pay a total of $71,000 in interest and pay off your house in 17.25 years.
In comparison, the velocity banking chunking method would have you put a large line of credit (Example $6,000) towards your principle now and not pay any “additional” principle payments for 12 months. If you can save $500 per month, you can pay off $500 of your line of credit each month. It will take you 12 months to pay off your $6,000 line of credit so that you can borrow $6,000 again to apply towards your mortgage principle. With velocity banking chunks of $6000 every 12 months, you will pay a total of $65,000 in interest and pay off your house in 16.5 years. The initial $6000 line of credit @ 3% interest will cost you less than $100 ($97.50 to be exact) in interest over the 12 month period. Given the same $500 per month, Velocity Banking a $6000 chunk now will save you 9 months and $5902.50 over paying $500 extra towards principal each month. That is huge savings.
The difference is that you lower your principle $6000 12 months sooner with Velocity banking. That means you are paying way less interest over that 12 month period as compared to paying an additional $500 per month towards your principle. Because a loan is charged amortized interest, you save up to thousands of dollars in interest by lowering your balance now, rather than lowering it monthly over time. The differences are more staggering if you can afford $1000-$2000 per month. You can pay off your home in as little as 5 years from start to finish.
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 $500-$15,000 and put in into your mortgage now, then do it now. When you save that $500-$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 credit card or even better if you own a home, apply for a home equity line of credit. For velocity banking to work quickly and save you money, you need to stop putting money away and increase your cash flow as much as possible. Minimize your 401k contributions, shop for cheaper insurances, phone, and internet plans, and cancel some of your subscriptions and memberships. Think short term pain for long term gain. For a complete guide on how to prepare for Velocity Banking, read my 10 steps to prepare here.
Your line of credit, whether it is a credit card, or home equity line of credit, becomes your new bank account. Your entire paycheck should go into paying off the line of credit. Need to pay the $60 electricity bill? Borrow the $60 from the line of credit. Got your paycheck or found $0.17 under your car seat? Put all of that money into paying down the line of credit. You need to literally treat the line of credit as your main checking account.
This post is a high level summary on how velocity banking helps you pay off debt fast. There are many other use cases, benefits, and risks to velocity banking.
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