Velocity banking is a strategy that uses a home equity credit line to repay debts instead of traditionally paying off debts with just the money you earn each month. Proponents of fast banking claim that using it will help you reduce / repay your debts much faster and significantly reduce the interest you pay on these debts.
At first glance, velocity banking sounds very attractive. Many believe that it will benefit them by allowing them to repay their mortgages early. But there are some basic assumptions made by a fast banking strategy that can fall apart in reality and leave you with a greater financial burden than you planned.
How does velocity banking work?
The concept of velocity banking is easy to understand. To repay the debt, you will need to open an account or LOC as the main current account. Any accounts or large debt payments must be made to this account. In essence, this means that instead of paying off the mortgage directly, you will pay off your credit line (LOC) first.
With the LOC you have opened, you are free to receive funds, as is the case with a bank account. After withdrawing money from the LOC, the balance for loan repayment increases by the same proportion. Then all your salary will be deposited in the LOC, knocking down the balance. In essence, you will live on the LOC, with the balance to be paid reduced after your salary is paid, and the balance will increase as soon as you withdraw money to serve your needs.
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Is velocity banking your path to prosperity?
Yes, velocity banking can help increase your home equity. But it’s not a savings, and you can’t always access it. The problem is that in order for money to really be considered a savings, it must have maximum liquidity and security. You need to have reliable and fast access to cash so that they serve you when you need it. So while you can increase your home equity, you are not really increasing the money you can access and use.
For speed banking to be successful, these assumptions must be true. For some people, this may help and meet their financial goals. But for those who want to save for retirement, want to receive a death benefit from life insurance or want to use the monetary value of life insurance,velocity banking may not be the best strategy.
Who benefits the most from Velocity Banking?
Although velocity banking is not the most effective way to repay a mortgage, it is a tool that can help you repay it as quickly as possible. This will help you if you find it difficult to save money or have not saved anything at all.
Velocity Banking helps you use your money, but you will end up paying more interest if you can avoid it. Velocity banking helps those who have investment real estate, but use it in other ways. They require more additional cash flow and are expected to have more cost to the assets they manage. HELOC provides such an opportunity. You can open multiple HELOCs for multiple properties, but this creates a financial burden if one piece of the puzzle suddenly stops working.
How does HELOC work?
HELOC is used as the main expense account instead of the current account. This eliminates the need for a savings account, as all free cash flow is directed to the mortgage through HELOC. Any bills or significant debt payments will be credited to this account, which means that the mortgage will not be paid directly, but through HELOC or LOC.
HELOC works in a way that allows you to withdraw (this is also called chunking) and deposit money into the LOC in the same way as you do with a bank account. After you perform the withdrawal, the balance to repay the loan is increased by the same proportion. If you contribute all your salary to HELOC, you will reduce the balance. Finally, when you use banking speed, you live on HELOC, with the balance increasing each time you withdraw funds and the balance decreasing each time your salary is deposited.
How can I get the most out of HELOC?
The best way to get the most out of HELOC is to first repay the debts with the highest interest rate, effectively reducing the due interest payments. The strategy includes options such as opening a credit card at 0% interest and transferring the balance of debt from other liabilities to the credit card, and then quickly repaying the credit card with a home equity credit line (HELOC). Depending on how you use this strategy, calculations show that you can fully recoup your home quickly, usually in 5 to 10 years.
However, debt reduction is not as easy as it seems, and various factors determine the end results. In the following text, we debunk the myths about velocity banking and compare the advantages and disadvantages of this strategy.
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What are the advantages of Velocity Banking?
- Rapid debt reduction – Repayment of a 30-year mortgage during the first 5-7 years is not uncommon or rare. At first this may seem difficult, but following the phenomenon of banking speed, this can be easily achieved.
- Increased monthly cash flow – Now that you are on track to quickly track your debt, this will mean that you will free up money that can be spent (or saved) elsewhere.
- Reduced stress – Once you are satisfied that your mortgage payments are actively struggling (with your debt payments, which are planned to be paid long before their 30-year term), you no longer have to worry because you control your finances. Then you will reduce stress.
- Creating Financial Independence – By getting rid of this large and awkward debt burden, you will be able to create wealth for yourself and your family. You can even use debt to help yourself and take advantage of leverage to expand your assets and thus create financial independence.
How to get rich with Velocity banking strategy
· Use velocity banking to help you repay your debt
Velocity banking uses a home equity credit line (HELOC) to repay or repay your debts and save money using various methods of accruing HELOC interest.
· Use velocity banking to repay the mortgage
Once you get rid of other debts, you can also usevelocity banking to speed up mortgage repayments. You apply the same principle as before, using HELOC to make large payments on the principal amount of the mortgage. Then use your salary to repay the HELOC balance.
· Use velocity banking to buy a home and save equity as a purchasing power
You do velocity banking even further and use this principle to buy a house with HELOC. In this case, HELOC takes first place because there is no traditional mortgage. However, this is not an easy task. To find a bank that wants to issue such a HELOC for this purpose, you will need some work. After you buy a house with HELOC, you apply the basic principle of Velocity banking to repay it.