Understanding The Velocity Banking Strategy [Full Details]

Understanding The Velocity Banking Strategy

Velocity banking is commonly used as a personal finance strategy that uses a home equity line of credit (HELOC) to leverage disposable income and pay off a principal home mortgage faster while avoiding amortized interest from the mortgage.

The idea behind this velocity banking strategy is to use cash flow and additional funds to cover costs and work toward paying off the mortgage using a line of credit.

Although it could be beneficial to certain individuals’ financial situations, it isn’t the best choice for everyone. Before applying for a HELOC, it’s extremely important to do your research and decide if it could yield an advantageous financial outcome for your specific situation.

HELOC Benefits

There are a few reasons people are becoming more interested in using velocity banking. Depending on an individual’s financial scenario, the most significant advantages of leveraging a HELOC could include:

Debt reduction: If you successfully deploy velocity banking and "paycheck-parking" techniques, you may be able to lower your total debt and pay off your mortgage early.
Monthly cash flow growth: Cash flow refers to the entire amount of money coming in and moving out of a business, directly affecting liquidity. One can track debt obligations through velocity banking, freeing up money they may put toward savings or other uses.
Less interest: Through velocity banking, a person exchanges mortgage debt for HELOC debt when they use the HELOC to pay down the mortgage obligation. Depending on the HELOC interest rate, this could result in lower interest.
Achieving financial freedom: If you’re able to lock in a low-interest HELOC, you can get rid of the high-interest debt, which could more quickly lead to financial independence.

Cons of Velocity Banking and Opening a HELOC

HELOC adjustable rates: Many banks do not offer HELOCs with fixed rates, making it difficult to determine how much interest you’ll ultimately pay. With variable interest rates, it could be impossible to realistically estimate potential financial outcomes. You could even end up spending more money than if you had directly paid for your mortgage.
Credit score: You need a good credit score to qualify for a HELOC. If you have an average or low score, you’re likely not eligible for a HELOC. You’ll need to build your credit before applying.
Need for a free cash flow: Free cash flow is necessary for velocity banking since it’s used to pay down some of the outstanding balance.

A line of credit can be a slippery slope. Many people who open lines of credit end up getting further into debt. Additionally, current mortgage interest rates are relatively low, so borrowing money to leverage a home loan while putting extra cash in your investments or retirement funds will likely yield a more significant return right now.

Is Velocity Banking Effective?

While using a velocity banking strategy to pay off your mortgage can help you do so more quickly, it’s not for everyone. It can be stressful and complex managing the account, and there’s no guarantee you’ll finish with less interest owed. If you’re looking for a way to pay off your mortgage faster, speak with a financial advisor, and take your time to map out potential financial outcomes before opening a HELOC.

About the Author Kim Brown

A passionate blogger! Editor at Toptennotch. I love to travel & writing. Regularly writing about different topic for various magazines, newspapers and websites. Happy Reading!!!