Lately, there has been a growing interest in the concept of velocity banking. This concept is already well known in countries like Australia or UK, but it’s just starting to become famous in the USA.
Once you become a homeowner, there is a higher chance of hearing about velocity banking. Some people will tell you that it’s a great way to pay off your 30-year mortgage in 5-7 years, while others would protest, claiming it’s a scam.
You might be thinking that this is another financial service provided by the bank. Still, on the contrary – the velocity banking strategy is what you can use to pay off the entire mortgage and gain financial freedom.
Are you interested in finding out more? Let’s dig into this complete guide to velocity banking that will help you learn how to use the home equity line of credit (HELOC) for debt reduction and total mortgage payment!
Velocity Banking — also known as the “HELOC Strategy” — is a personal finance approach that uses a home equity line of credit (HELOC) to leverage disposable income to pay down your primary mortgage while saving the amortized interest.
The concept is based on utilizing a line of credit to help use cash flow and extra money to cover the expenses and go toward paying off the mortgage. In most cases, this strategy relies on a Home Equity Line of Credit (HELOC) or a LOC.
HELOC is used as a primary expense account instead of a checking account. This eliminates the need for a savings account since all free cash flow will go toward the mortgage via the HELOC. Any bills or significant debt payments will be made into this account, which means that the mortgage won’t be paid directly, but through HELOC or LOC.
HELOC functions in a way it enables you to withdraw (it’s also called chunking) and deposit money into LOC in the same way you would do with a bank account. Once you execute the withdrawal, the balance to repay the loan goes up by the same proportion. If you deposit your entire paycheck into HELOC, you will lower the remaining balance.
In conclusion, when using velocity banking, you live off the HELOC, with the balance increasing every time you withdraw the funds and the balance lowering every time your paycheck gets deposited.
The best way to make the most out of this concept is to pay off the highest interest rate debts first, effectively reducing the interest rate payments due.
The strategy includes variations such as opening a 0% interest credit card and moving balances of debt from other liabilities to the credit card and then paying off the credit card fast, using a home equity line of credit (HELOC). Depending on how you use this strategy, the calculations say you can fully pay off your home quickly, usually between 5 – 10 years.
However, the debt reduction isn’t as simple as it sounds, and different factors determine the final results. In the following text, we will be debunking myths about velocity banking and comparing upsides and downsides to this strategy.
There is a reason velocity banking is becoming that popular amongst people interested in real estate and real estate investing. There are a couple of reasons contributing to this, and we highlighted the most important benefits.
Manage to successfully implement velocity banking combined with what we call a “paycheck-parking” strategy. You will be able to reduce your debt and pay off the entire mortgage within 5-10 years. This applies to shortening even those 30-years mortgages, which is 60-80% quicker than expected.
Cash flow — by its definition — is the total amount of money being transferred into and out of business, mainly affecting liquidity. With velocity banking, you ensure you track your debt obligations in a meaningful way, thus freeing up the cash you can save or spend elsewhere.
If you use your HELOC balance to pay off your mortgage debt, you are in a way trading out your mortgage debt for HELOC debt. This is a good thing since HELOC uses a simple interest calculation, so you will end up paying less interest than initially planned.
They say that besides health worries, people worry about their finances the most. Velocity banking is a concept that gives you more extensive control of your finances, thus leaving you calmer knowing monthly payments are reducing your debt, and you are obliged to pay less interest.
Financial independence is usually linked to the concept of Infinite banking. However, it can also be connected to the concept of velocity banking. Using this strategy can help you erase the high interest debt and focus on building your wealth sooner.
There are always two sides of the coin – velocity banking is no exception. No matter the benefits of this strategy, there are also some sacrifices to be made and downsides to be aware of. We highlighted the ones you should bear in mind.
A good credit score is a necessity when it comes to opening a LOC. However, whenever you withdraw money from LOC, your credit score takes a hit. No withdrawal can go unnoticed, and that’s something you should have in mind if considering applying for other financial services in the future.
Even though velocity banking is a step towards financial independence, you should be aware that you won’t have complete control over your cash flow. There are calculations to be paid and the entire system to be followed and respected: depositing paycheck into HELOC, making all the extra payments using a credit card, chunking money into LOC to pay off the amount of interest, etc. This all requires a positive cash flow to bring you good results.
This might seem easy, but there are countless examples of people who misused their HELOC balance and ended up losing money. You should never withdraw funds from LOC for regular payments and expenses. There are rules to be followed – after the first month, they become crystal clear, and the only thing left needed is your discipline.
The Velocity banking strategy sounds very appealing to most of us. Reducing our lender’s interest rate after applying “paycheck-parking” for the first time shows benefits at first glance.
However, you should be aware of some common myths and assumptions before choosing velocity banking as a strategy. Here are the most important ones and the problems that follow with.
We’ve been taught that paying off our mortgages should be our number one priority, meaning that we should use all the possible funds we have and apply strategies that will help us get there. This is the fact, but there is a specific price that comes with it.
Often, our homes are our most effective liabilities, and it isn’t by default terrible to have a mortgage on it. On the contrary, in some cases, it can be more beneficial to continue to pay off the mortgage while using some of the free cash flow to build cash value in the whole life insurance or grow savings in any other way.
Not using all available funds only to pay off the mortgage can open many doors for you.
Velocity Banking is built on the assumption that you should save interest to benefit from paying off your mortgage early. Even though interest payments can be an enormous burden, they are often not the most crucial factor in paying off the mortgage.
If you zoom out and consider what’s the best for you in the long run, you’ll be able to see that by using all of your free cash to pay off liabilities, you can also end up losing opportunity costs. There are no rules for this, so you should estimate your situation before assuming that saving on interest payments is the most important thing.
We understand our liabilities as our debts. However, this is not a simple equation that can be easily applied here. The actual definition of debt is “a negative equity”, which means you shouldn’t be assuming your liability is a negative thing in the first place.
In other words, you are in debt only when your liabilities exceed your assets, which means that you shouldn’t, by default, try to become “liability-free” under all circumstances. Instead, there should be a proper evaluation of each liability before determining whether you should keep it or pay it off, as well as – what is the ideal time it should be paid off.
Just because you have a liability doesn’t mean you’re in debt.
After you assess all of your liabilities, there should be a paying-off strategy in place. This means that you shouldn’t be prioritizing debt payment above everything else, as there might be higher debts to pay off – leaving you with money and opportunity loss.
You should prioritize paying off the liabilities that free up the most cash flow and keep the most efficient liabilities. To make the prioritization in the right way, you should first do a cash flow analysis.
On the other hand, if your long-term goal is to build time and money freedom, you might want to create as much cash flow as possible while keeping healthy savings and paying off the debts gradually.
You should be aware that equity in your house does not equal savings and that it can happen that you can’t access it.
For an asset to be saving, it must have maximum safety and liquidity. Additionally, it usually has the most competitive growth.
Home equity does not pass any of these three statements:
- It isn’t safe, as the housing market value can drop, lowering your asset’s worth, and the amortization is always a factor
- It isn’t liquid, as no one can guarantee you could convert it into cash (especially quickly and straightforwardly)
- It has no rate of return (your house appreciates regardless of how much equity you have).
To conclude above explained assumptions: velocity banking is not by default a good strategy for managing your finances and will not give you total control over them. You should do the proper analysis and research before starting your velocity banking journey. Or — on the other hand — you can consider becoming your own banker and use the advantages of having a life insurance policy to build financial independence.
To make a comparison and proper choice between infinite banking and velocity banking, first, you need to understand the concept and principles of infinite banking.
The concept of infinite banking is about strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system. In other words, Infinite Banking is essentially being your own banker.
One of the many benefits of a whole life insurance policy is that policyholders can borrow money using their policy’s cash value. Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
The way infinite banking works allows you to mimic the way a bank operates and borrows money.
Instead of borrowing from a bank, you borrow from yourself while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.
Whether it be for your child’s education, a downpayment on the house, or medical expenses, borrowing for yourself and being your own bank allows you the financial freedom and control of your money.
This is the overview of the key differences between Infinite Banking and Velocity Banking. As you can see, both of these strategies are there to help you pay off your debts and build personal wealth.
The main difference lays in places used to store cash. In Velocity Banking, the money is stored in the home equity. In Infinite Banking, the money is stored in the cash value of the life insurance policy. The conclusion is that you can gain much more security and control over your finances by using Infinite Banking than with Velocity Banking.
For additional comparison, you can watch this YouTube video Walth Nation prepared with Denzel Rodriguez and learn more about the topic.
So far, you got acquainted with both concepts – velocity banking and infinite banking. We concluded that Infinite banking brings you more control over your finances, and this is how it goes.
- Velocity Banking is quite risky and doesn’t put you in control – as you can’t control your cash flow completely. In contrast, Infinite Banking maximizes your control, eliminating the need to use banks and depending on the external factors.
- The result of Velocity Banking is putting all your cash flow into home equity, which is not something that we would recommend. As mentioned before, paying off the debts should not be done under any circumstances. On the contrary, there should be a strategic plan for this. With Infinite banking, your cash flow is not limited only to your home equity, but you can also build savings and your cash value using your life insurance policy.
- Home equity isn’t savings because it can lose value, the bank still has veto power over whether you get to access your cash, and it doesn’t earn any rate of return.
- You should always be aware of which asset has the maximum safety, liquidity, and growth. That asset should be your number one choice when it comes to directing your cash value. This will help you gain much more control than directing your surplus blindly to your home equity could ever.
- When using Infinite Banking, you store cash in the ideal bank that you can use for any emergency or opportunity because your cash value won’t drop, and you have guaranteed access to use your money.
- Infinite Banking gives you a competitive, compound growth rate on your cash. That means that you can build your wealth even when you put your cash in other assets.
- With Infinite Banking, you can earn a return rate on the same money in two places simultaneously by investing in different assets. This makes your journey to financial freedom much easier and more pleasant.
There are many benefits of the Infinite Banking Concept. The best thing is that implementing this strategy does not require you to become finance savvy or invest a tremendous amount of money. On the contrary, Wealth Nation prepared a learning program for you that can help you become your own banker in eight weeks.
Even though velocity banking was not well known until recently, there are enough reasons for that to change. Nowadays, we are becoming more and more financially educated and ready to control our finances.
The truth is – as long as you keep using financial services provided by banks, you will never gain complete control. A new way of thinking helps you understand how the banks work and what you should do to mimic their behavior and benefit the most.
You probably didn’t know this, but banks are the number one buyers of life insurance policies in the world. That’s because life insurance policies enable you to build your cash value over time, access your cash quickly and borrow against your life insurance with the lowest interest rate.
You can learn more about the Infinite Banking concept and how to become your own banker by enrolling in the Wealth Nation membership program. Repaying your debt but also building your wealth is only a couple of lessons away from you!