Is anyone on here familiar with the financial tool Velocity Banking, where you transfer your assets into a line like a credit card and use the credit to pay down your debts at an extremely fast rate. Its touted to help people paydown standard 30 year mortgages in 6-7 years.
Hi there, and welcome!
Looking forward to hearing what our community members have to say about this. At first glance, it seems that this strategy would hinge on some key variables such as the interest rate for the LOC, early repayment terms on ones’ mortgage, current cash flow, etc.
Do you have any personal experience with this, or is it something you are considering?
Hi LightWorks. I’ve not used velocity banking but have read quite a bit. I am unable to do the math in a way that use of a credit card or HELOC as an intermediary account makes sense. Yes, you’ll get out of the mortgage more quickly than if you make an on-time payment each month, but not more quickly than if you simply paid extra toward principal each month from your regular checking account. There’s no magic in using a HELOC.
The upside might be that it laser-focuses attention on your debt, and if adhering to strict payment schedules as velocity proponents suggests gets you there, great.
But velocity banking won’t address any underlying spending problem if you have one. Borrowing money at a higher rate to pay off lower rate debt isn’t a strategy. It’s a scheme. And if it just pushes your problem down the road, you may wind up owing less on your principal but losing the house to foreclosure just the same.
Another huge risk is that lines of credit, including credit cards and HELOCs, have variable rates. And those are going up. It doesn’t make a lot of sense to pay off a low fixed rate with a higher, variable one. You could end up paying a lot more in interest, especially if anything goes wrong you’re not able to pay it off within a few years.
So i dont understand why you wouldn’t swap the mortgage to a heloc and throw everything at the heloc… WHY would you take on a extra interest payment . The heck with the credit card cash back its null and void when you take into account credit card interest, and if you really want to put it somewhere and chunk at the heloc in chunks then put it into a liquid money market account and throw 6 month chunks. Build throw build throw and guess what in a money market you dont pay interest you earn it. Granted its not much more than your savings still its interest earned not payed !!!
DISCLAIMER : I am new to the site and have barely any real estate experience (only signing leases for residential rent and commercial rent and contract sales of my products to retailers) .
Hi and welcome, @oliversep1988! The main reason is interest rates. While mortgages typically have fixed rates, HELOC rates are variable and can rise quickly. If you can’t pay the debt off as fast as you think–and let’s face it, life happens–you could wind up paying more.
With a fixed-rate mortgage, your payment remains the same no matter what. You can throw extra money at the principal if you want, but you’re not required to do so. That can be really helpful if you facing a financial setback, such as a job loss.
I hope that helps explain why this probably isn’t a good idea for most people. But feel free to ask any follow-up questions!
your right INTERESTING INTEREST why get a additional interest payment THAT YOU PAY. who cares that it is a better type of interest its still paying more money. there are only two real types of interest …INTEREST YOU PAY AND INTEREST YOU EARN. If you have a mortgage att 18% and a LOC at 6% then your paying 24% interest (with a amortized/simple split) no matter how you look at it!!! 18% amortized and 6% simple.
What they don’t tell you is to pay off a 100K mortgage in 7 years you still have to pay at least 100K. There is no magic bullet that makes the debt go away. All their demonstrations assume you make substantially more than you need to live off of, and use all of that extra money to pay down the mortgage. You can pay more towards your mortgage every month without anyone’s help.
The whole point of debt acceleration, “Sweep Strategy”, “Velocity Banking”, or whatever you want to call it is NOT to reduce the principal paid back. It’s to reduce the amount of interest you pay over the life of the loan.
For example: $200K at 5% for 30 years …
Initially, your payments are mostly interest.
Making only the scheduled payment, that doesn’t turn around until roughly the 195th payment (16-1/4 years - past the half-way point in the life of the loan). By that point, the total of payments is already in excess of the original principal balance - roughly $202K. By the end of 30 years, the interest amounts to nearly $187K, meaning it’s a 93.5% loan, not 5%. Amazing what compound interest can do, eh?
By accelerating that to the tune of an additional $15K of principal per year (if you can manage it), the payoff comes closer to the 10 year mark and the total interest paid is closer to $52K or 25% of the initial loan balance. Big improvement.
- why would you get a variable rate heloc when you can have a fixed rate heloc ???
Glad you’re interested in learning more about this! Paying down a mortgage faster definitely saves interest–but making extra principal payments on a fixed-rate mortgage will do the job just as well at lower risk. Yes, some HELOCs have a fixed-rate option, and there’s always the fixed-rate home equity loan–but the longer the fixed-rate period, the higher the rate you pay, and that rate will be higher than current fixed mortgage rates.
Also, many people have better things to do with their money than pay down a fixed-rate mortgage. We recommend people max out their retirement savings, have a decent emergency fund, pay off all other debt and have adequate insurance before they start making extra mortgage payments.
Hope that helps!