You‘ve probably heard about velocity banking at a point in your life. Especially when you become a homeowner. Velocity banking is one of the most searched mortgage-related terms on the internet. For those who are curious about what velocity banking entails and how you can use it to gain wealth, this article was written for you.
What Does Velocity Banking Mean? ❓
Velocity banking is referred to as the home equity line of credit (HELOC) strategy. It is a financial strategy that uses home equity lines to exploit disposable income in an attempt to pay off your mortgage quicker. Usually, banks can lend up to 80-90% of the cumulative loan-to-value ratio for a second mortgage based on the credit. If your home has excellent value, you can borrow enough to cover the monthly costs and principal reductions.
Velocity banking’s idea is that your credit line serves as the primary account through which you pay off your debts each month. Then, whatever remains in the account is used to pay the balance on the initial mortgage. This means that you don’t need to have a savings account since all your extra money will make principal payments.
As a homeowner, paying off a mortgage is frustrating and often takes a long time to complete. Velocity banking is a financial strategy designed to help homeowners pay off their mortgage debts in record time. With velocity banking, homeowners open a HELOC and make it their primary checking account. Then, you can deposit your monthly earnings and use the money to pay off your debts.
The first step is to open the HELOC. After doing that, you can make a single large payment to your mortgage. Then, within the next couple of months, you will receive your monthly payments through HELOC and also use it to pay your debts. Once you have paid off the balance, you can repeat the process of settling in large sums until you ultimately pay off your mortgage.
Velocity Banking Examples
Let’s assume you have a mortgage for $100,000 with an annual percentage rate of 5%. Your real estate has an estimated value of $125,000, with an equity of $25,000. You receive a monthly payment of $4,000 and need to pay off debts worth $3,000, including a monthly mortgage payment of $567. This means that you have $1,000 left as your own money.
Remember, you have the HELOC as your primary checking account. You can begin the process of paying off your mortgage as soon as you enable the account for direct deposits.
Some financial institutions have the Loan-to-value ratio set at a maximum of ninety percent. About this example, the bank will provide a HELOC with about $112,500 depending on the real estate’s appraised value. You will get your HELOC at a 7% Annual Percentage Rate. Do not forget that you have $4,000 as income and $3,000 as expenses. Therefore, the money left in your account will be $1,000.
At this point, you have successfully passed the initial stages of Velocity banking. So, you can now make a single large payment of $6,000 to the primary mortgage. This will be considered as a principal-only payment for your loans.
After that, the mortgage becomes $94,000, and the HELOC balance is $6,000. However, you will continue to make your monthly mortgage payments of $567 (which is part of your expenses). This means you will incur interest expenses on the HELOC and mortgage for six months until you finally pay off the mortgage.
After that, you will need to make another single large payment for your mortgage for $6,000. However, you would have gained some interest by this time. Your mortgage payment will continue to decrease, and the HELOC payment will remain at $6,000 each time you make a single large payment.
If you can continuously employ this strategy for another two and a half years, you will eventually have a relatively lower balance than only making minimum monthly mortgage payments. After three years, you won’t be needing HELOC any longer. And three months after the third year, the mortgage will be paid off entirely.
Instead of taking longer years to ultimately pay off your mortgage, it will only take approximately six years to do so using velocity banking impacts. What more can one say? It’s just phenomenal.
Velocity Banking Advantages
- Allows You To Pay Fewer Interests: since this method of paying off debts requires a free cash flow, the timeframe at which you pay off your mortgage will significantly decrease. Since you are making upfront payments, the compound interest on the principal amount you owe will reduce.
- Allows You To Pay Off Your Debt Early: this idea of paying off your debts enables you to settle your debts in record time. This is because you are making upfront payments, which will, in turn, reduce the timeframe of your mortgage.
- Free up equity: a home equity line and velocity banking permits individuals to use the money they usually cannot have access to if they had used other debt-paying methods.
How Velocity Banking Can Make You Rich
To have wealth, you must be free from debts. In essence, a debtor cannot become rich. However, when you have the opportunity to pay off your debts in record time, it means that you can save your money and not spend it to settle expenses. Therefore, if you utilize the idea of velocity banking to determine costs and pay off mortgages, it is one step towards becoming wealthy.
Conclusively, individuals who find it rather difficult to save money or have not saved any money at all are the ones who can benefit from Velocity banking. This method of paying off debts can be seen as a tool that, when effectively utilized, can help people pay off large debts as quickly as possible. Also, people who engage in property investment harness the use of HELOC to make money.
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