Velocity Banking For Newbie: Definition, Pros, Cons, and Advantages
Definition of Velocity Banking
Velocity banking is a personal finance strategy that has gained popularity in recent years. It is a method of using a line of credit such as home equity line of credit (HELOC), regular line of credit (loc) and even credit card to pay off debt fast while saving on interest.
The velocity banking concept reduce the overall interest paid on amortize loan as it accelerate debt payoff up to free cash flow for other investment opporunities.
Velocity banking is not for everyone, and it requires high self-discipline and financial stability. It is essential to weigh the pros and cons of this strategy before deciding to implement it. In the next section, we will discuss the advantages and disadvantages of velocity banking in detail.
Pros and Cons of Velocity Banking
Like any financial strategy, velocity banking has its advantages and disadvantages. In this section, we will discuss both to help you get a better understanding of whether velocity banking is right for you.
Advantages of Velocity Banking
Pay off mortgage and other amortize debts faster
According to Wealth Nation, velocity banking can help homeowners pay off their mortgages and other debts faster than traditional methods. By using a HELOC to pay down the primary mortgage, homeowners can reduce the amount of interest paid over the life of the loan. This can potentially save thousands of dollars in interest payments.
Save thousands of dollars in interest
One of the significant benefits of velocity banking is the potential savings on interest payments. According to Truth Concepts, by using a HELOC with a lower interest rate to pay down a primary mortgage with a higher interest rate, homeowners can save thousands of dollars over the life of the loan.
Increased cash flow
Velocity banking can also increase cash flow by freeing up money that would have gone towards mortgage payments. This extra cash can be used to invest in other opportunities or pay off other debts. According to Life Benefits, this increased cash flow can help homeowners build wealth and achieve financial freedom.
Potential tax benefits
Another advantage of velocity banking is the potential tax benefits. In some cases, the interest paid on a HELOC can be tax-deductible, which can lower the overall tax bill. According to First Lien HELOC, homeowners should consult with a tax professional to determine if they are eligible for any tax benefits.
Disadvantages of Velocity Banking
Requires discipline and financial stability
Velocity banking requires a high level of self-discipline and financial stability. And you can do velocity banking without a steady source of income and access to revolving line of credit.
Without proper financial planning, management, and proper understanding of the velocity banking concept, you can over leverage and risk defaulting on your debt.
High risk in case of job loss or income reduction
Velocity banking carries a good amount of risk in case of job loss or income reduction. If you are unable to keep up with the payments, you risk defaulting on their debt and losing. It’s essential to hire an expert to mitigate common pitfalls.
HELOC and LOC rates are subject to change
Personal line of credits are revolving lines with rates that changes. These changes can affect the overall cost of the loan. If interest rates rise, the cost of borrowing can increase, making it more difficult to pay off the debt.
May not be suitable for everyone
Velocity banking may not be suitable for everyone. If you are not read, or you don’t understand how it works, you are at risk to making your situation worse.
How Velocity Banking Works for Paying off a Mortgage
Velocity banking involves using a revolving line of credit like HELOC, PLOC and other open ended line of credit to pay off amortize debt like primary mortgage, student, and car loan faster. The strategy involves using the line of credit as a primary expense account with high self-discipline.
In this section, we will discuss how velocity banking works for paying off a mortgage.
Step 1: Qualify for a HELOC
To implement velocity banking, homeowners must first qualify for a HELOC. According to The Ways to Wealth, homeowners must have a good credit score, a stable source of income, and equity in their homes. The amount of equity required may vary depending on the lender.
Step 2: Draw from the HELOC
Once homeowners have qualified for a HELOC, they can begin using it to pay off their primary mortgage. The first step is to draw from the HELOC to pay off a lump sum amount of the primary mortgage.
Step 3: Use HELOC as primary expense account
After paying off a lump sum amount of the primary mortgage, use the HELOC as a primary expense account. This involves using the HELOC to pay for everyday expenses, such as groceries and bills. According to Wealth Nation, homeowners should try to keep the balance on the HELOC as low as possible to reduce interest charges.
Step 4: Paycheck parking
The next step in velocity banking is to use a technique called paycheck parking. This involves depositing the entire paycheck into the HELOC at the beginning of the month and then using the HELOC to pay bills and other expenses throughout the month. This is how you save on interest charges by reducing the average daily balance on the HELOC.
Step 5: Repeat the cycle
The final step in velocity banking is to repeat the cycle. Homeowners should continue to use the HELOC as a primary expense account and deposit their paychecks into the HELOC each month.
Is Velocity Banking Right for You?
Velocity banking can be an effective strategy for homeowners looking to pay off their mortgages and other debts faster. However, it is not suitable for everyone. In this section, we will discuss some factors to consider when deciding whether velocity banking is right for you.
Factor 1: Equity
According to Life Benefits, velocity banking requires homeowners to have equity in their homes. The amount of equity required may vary depending on the lender. Homeowners should consider whether they have enough equity to qualify for a HELOC before deciding to implement this strategy.
Factor 2: Credit Score
Another factor to consider when deciding whether velocity banking is right for you is your credit score. According to The Ways to Wealth, homeowners must have a good credit score to qualify for a HELOC. If your credit score is low, you may not be able to take advantage of this strategy.
Factor 3: Financial Discipline
Velocity banking requires a high level of financial discipline. According to Wealth Nation, homeowners must be able to control their spending and avoid accumulating debt on the HELOC. If you struggle with financial discipline, velocity banking may not be the best strategy for you.
Factor 4: Risk Tolerance
Velocity banking carries a high level of risk. According to The Ways to Wealth, homeowners risk defaulting on their debt if they are unable to keep up with the payments on the HELOC. If you have a low tolerance for risk, you may want to consider other strategies for paying off debt.
Factor 5: Other Options
Finally, it is essential to consider other options when deciding whether velocity banking is right for you. According to Truth Concepts, homeowners should consider refinancing their primary mortgage or using a debt snowball or debt avalanche strategy to pay off their debts. It is essential to weigh the pros and cons of each strategy before deciding which one is right for you.
Velocity banking can be an effective strategy for paying off mortgages and other debts faster. However, it requires careful consideration and financial discipline to implement successfully. Homeowners should weigh the pros and cons of this strategy and consider their financial situation before deciding whether velocity banking is right for them.
Velocity Banking Frequently Asked Questions and Answers
What is velocity banking?
Velocity banking is a debt reduction strategy that uses a HELOC.
Who can use velocity banking?
Homeowners with equity and good credit can use velocity banking.
How does velocity banking work?
Velocity banking involves using a HELOC as a primary expense account.
What are the advantages of velocity banking?
Velocity banking can help pay off debt faster and save on interest payments.
What are the disadvantages of velocity banking?
Velocity banking requires financial discipline and has a risk of default.
How does velocity banking compare to refinancing?
Refinancing and velocity banking both have pros and cons for homeowners.
What are some alternatives to velocity banking?
Alternatives to velocity banking include the debt snowball, debt avalanche, infinite banking, and tax-advantaged accounts.