No one likes to make mortgage payments every month, and every house owner desires to get debt free as soon as possible. Velocity banking refers to using a line of credit as your primary account and making lump sum payments towards the mortgage loans.
Most mortgage loans have a term of 20 years or more. The longer the loan term you have, the more interest you pay for it. The basic idea behind it is using a Home Equity Line of Credit (HELOC), where the HELOC functions as your primary account. Therefore, all your free cash flow goes towards the repayment of a mortgage loan via HELOC.
Though the velocity banking strategy works well on paper, several factors may change its effect. Here are some common FAQ’s related to velocity banking.
How Does It Work?
In this form of banking, you use the line of credit to pay your high-interest debt first, effectively reducing the interest rate.
How Fast Can You Repay Mortgage Loan by Velocity Banking?
Experts argue that you can clear your mortgage loan in 6-7 years with velocity banking. So if the loan term were 30 years, you would be saving interest for 20 plus years, and it would be equivalent to saving a significant amount of money.
What Do You Need to Leverage Velocity Banking?
It would be best to have equity in your home, a credit card for regular living expenses, a solid credit score (680 or higher), and a positive cash flow (your income needs to exceed your costs each month).
You do not need huge equity to leverage velocity banking. However, the equity should be good enough to use your house as collateral. Having considerable home equity will help you get a more extensive line of credit, accelerating your progress toward getting debt-free.
Why Should You Test Velocity Banking?
It allows you to pay large chunks of funds to decrease principal mortgage loans. If you look at your mortgage repayment plan, you will pay a minimal principal in the first ten years. A large amount of payment goes towards interest and less towards the principal amount in the first ten years.
How Can You Ensure It Works?
To ensure the velocity banking strategy works for you, use a loan analysis calculator to get a detailed amortization schedule. The loan analysis calculator will show the payback of monthly installments with interest rates and declining loan balances.
With detailed loan analysis, you can find out how using a line of credit and making lump sum payments towards the mortgage loan’s principal can help you get debt-free faster.
What Are The Other Alternatives to Repay Mortgage Loans Faster?
Using cash value is an excellent way to repay mortgage loans. Cash value accounts like life insurance provide some liquidity without affecting the compounding growth. If you have a cash-value account, you need to seek the help of a finance professional to see whether it is well-suited for a repayment scheme.
Velocity banking can reduce the stress that comes with monthly mortgage payments. It will help you get debt-free and grow your cash flow that can be used to save or spend elsewhere.