Infinite and velocity banking are the two alternative concepts whose idea is to help people annoyed with the banking system, fees, and loan interest rates.
We need to acknowledge that both infinite and velocity banking strategies have strengths and weaknesses, which opens up the question of which is better for you.
To help you answer it, we will cover in this article:
- What is velocity banking, and how does it work
- What is infinite banking, and how does it work
- Velocity banking vs infinite banking comparison
- Our final verdict and piece of advice
If you want to become financially independent, keep reading!
What Is Velocity Banking?
Velocity in velocity banking refers to the speed of paying off your mortgage that it promises. After positive impressions on the Australian and English markets, velocity banking has expanded to the US market.
The velocity banking strategy generally leans on the HELOC or LOC credit line.
HELOC or ”Home Equity Line of Credit” is a loan secured by a mortgagor’s home.
HELOC is just one kind of Line of Credit (LOC), which represents a borrowing limit that a borrower can draw at any time. With a home equity line of credit, you can access it as you choose. It is a revolving source of funds, very similar to a credit card.
You need to invest your income into a HELOC, and in that way, you are canceling interest on the periods of a month when your money would be useless. It is known as the interest cancellation effect.
The basic idea is to use the most cash flow and extra money to cover costs and repay the mortgage principal utilizing the credit line. The mortgage principal is the sum you borrowed to buy your house.
Considering HELOC is used as a primary expense account alternatively to a checking account, it excludes the need for a saving account. It is because all your cash flow goes directly to HELOC. And that is a reason why people believe that the velocity banking process will help them pay off mortgages faster and with less interest.
Usually, you have insight into details and your current mortgage balance.
How Does Velocity Banking Work?
HELOC allows you to pull back and deposit money into LOC just like you would do with a bank account. This is called chunking.
When you pull out the money, the balance to repay the loan goes up by the same scale. If you invest all your money into HELOC, you will lower the remaining balance.
It is designed to use HELOC for everyday expenses, with the balance growing every time you drop out the payment and the balance lowering every time your paycheck gets deposited.
It’s recommended first to repay the debts with the highest interest rates, as the concept brings the most significant results that way.
To leverage velocity banking, except equity in your home, you will also need the following:
- A solid credit score (680 or better),
- A credit card for your monthly living expenses,
- Positive cash flow.
You need to have enough equity in your home to qualify for HELOC, but it isn’t a humongous amount. However, more home equity enables you to have a more extensive line of credit which helps you hasten the process.
You can calculate how much equity is in your home simply by using a mortgage balance. A mortgage balance is an entire worth you owe at any stage of the mortgage. It is the amount of the remaining principal due and accrued interest. The mortgage balance is reduced from the house’s market value to establish the equity.
Step By Step
First, you apply and open up a home equity line of credit. Let’s say it is a $30 000 HELOC for this illustration.
Then, you use that money for your mortgage payment. Essentially, you are paying mortgage debt with HELOC debt.
You are using HELOC instead of a checking account. You directly relocate those funds to the HELOC account and use your profit to pay down the balance when you get your paycheck.
The next step would be to pay all your monthly expenses with a credit card.
Once per month, you utilize the HELOC for your mortgage payment and credit card balance.
The crucial step is this: you are paying down the HELOC balance since you have a positive cash flow. Thus, when your HELOC balance reaches $0, you pay another $30 000 from HELOC to the mortgage and start the process again.
Finally, you will pay off the balance of the mortgage. And after disbursing the HELOC balance, you will be free and independent.
We have no dilemma why this sounds tempting to many people. Mostly, they think that paying your mortgage early is the most significant advantage of velocity banking. Despite this, you may end up with more financial loans if you don’t consider assumptions that rely on velocity banking.
Assumption #1: The central financial aim is to pay off the mortgage early.
It might seem unreasonable to some people, but you may not want to pay your mortgage immediately.
It may be wiser to continue to repay the mortgage while using some of your free cash flow to invest or increase your savings in other ways.
Assumption #2: The most crucial aspect in paying off your mortgage is saving on interest payments.
Velocity banking depends on the belief that you need to save interest to benefit from paying off your mortgage early. However, interest payments are not naturally the essential element.
Often people forget that they are using all of the free cash toward saving interest.
Even though paying off liabilities will decrease interest payments, it also can create a situation where you spend all of your free cash and go through losing opportunity costs in the end.
Assumption #3: HELOC considers your home equity as savings and will comprehend the best.
Although velocity banking can help raise your home equity, it is not the savings.
If money is actual savings, it must have maximum liquidity and security, which HELOC does not provide. The problem is that you are not actually growing the money you can approach and use.
So this concept is successful if you agree with these hypotheses. If you want to save for retirement or have a life insurance guarantee, then the velocity banking strategy may not be the best choice for you.
Benefits of Velocity Banking
The following pros are the most important to bear in mind.
Increment of Monthly Cash Flow
Velocity banking is an attractive way to pay off your house debt if you are disciplined and have disposable income.
Definition of cash flow is the total amount of money transferred in and out of a company. Cash flow generally influences liquidity.
With a velocity banking strategy, you establish your debt obligation in a way that works for you while also releasing the money you can save or invest in another place.
Debt payoff swift
If you peg away and hold consistently, you can decrease your policy loan faster than other strategies.
Assuming that you great achieve velocity banking combined with the ”paycheck-parking” strategy, you will be able to pay off the entire mortgage in 5 to 10 years which usually takes 30-ish years.
Velocity banking is convenient if you have acquired various debt payments. In that case, you might increase your quickness as these payments drain cash flow.
Lower Interest Fee
You use your HELOC balance to refund your mortgage debt with velocity banking. In effect, you are exchanging mortgage debt with another debt. You will pay less than expected since HELOC uses a simple interest calculation.
Stress Level Decrease
Breaking off with loans can really be liberating and joyful for the persona. Along with the financial benefit from eliminating a monthly mortgage payment, you reduce stress and anxiety. Relieving this type of stress can certainly help your overall sense of peace and commitment to other things in life.
Achievement of Financial Independence
Velocity banking allows you to eliminate the high-interest debt and focus on achieving prosperity.
Drawbacks Of Velocity Banking
As always, there is the other side of the coin. For some people, having access to a line of credit can lead to more debt.
A velocity banking strategy is not suitable when you do not have income security or if you are not disciplined enough to resist buying new things.
There Is No Provision For Safety
By safety, we mean the asset without a drop in value. You can lose your equity during a downturn of a housing market. The result of this uncertainty is no security of equity.
You Don’t Have Access To Your Cash At Any Time
To have home equity, you should sell your house or qualify on the bank’s terms for a loan or a line of credit. And even if you do so, maybe the bank will still say no. Borrowers can reach primary lenders on the primary mortgage market to get a mortgage loan. Primary lenders can be banks, mortgage brokers, mortgage bankers, and credit unions.
For qualification, it is generally necessary a credit score of over 680 and a debt-to-income proportion of under 43%.
Opened credit line yet doesn’t assure your entry and use of your equity.
First of all, you cannot use your revolving equity line during the entire HELOC due to two distinct chunks of time: the draw period and the repayment period.
The draw period usually lasts from 5 to 15 years, and during this period, you can access your equity in the same way you would do with an account balance in a checking account.
Despite this, after the draw period comes the repayment period, and it is a time when your entry to equity is closed. You cannot either use it or draw it.
The only option you can choose to enter your equity is to refinance in another HELOC. Yet, it is no guarantee the bank will allow you to access it.
Impaired Credit Score
The imperative to qualify for opening a LOC is a good credit score. Unfortunately, your credit score hits every time you draw the money. They notice every withdrawal you make. Bear in mind this information if you believe there is a chance you will apply for other financial services eventually.
Deficient of The Cash Flow Control
Velocity banking offers you, on the one hand, possible financial independence, but on the other hand, it doesn’t allow you complete control over your free cash flow. You need to follow concrete steps in the system: from depositing your salary to chunking money into LOC to pay off the amount of interest, etc. To meet these obligations, you need a positive cash flow.
Do not experiment with velocity banking if you have a problem with financial discipline.
You have to stick to the plan and stay on course even though life is not going as you planned. It may sound trivial, but numerous examples of people who have lost their money due to indiscipline prove that this is important to note.
Now let’s dig into infinite banking and see what this financial strategy offers.
What Is Infinite Banking?
Infinite in infinitive banking refers to the whole life insurance payout when you pass away.
The concept strategically uses a whole life insurance policy as a unique banking system. So, with the infinite banking concept, you become your own banker.
One of the most significant advantages of whole life insurance is an opportunity for policyholders to borrow money by only using their policy’s cash value.
Thanks to the borrowing system, you will never be in a position to borrow money from a bank. Instead, you would borrow from yourself (through your whole life insurance policy) and repay yourself whenever it is a good time for you. Therefore, you are your own bank.
The infinite banking aim is to duplicate the process to the full for building the value of your own bank.
The duplication process results from lending and repaying money that would ordinarily hold in the cash value of a long-lasting life insurance policy.
Instead of dealing with banking fees or interest rates on loans, you have control over your finances with an infinite banking strategy. It allows you to improve your work and achieve your individual and unique financial goals.
Discover the story of infinite banking.
History of Infinite Banking
An American finance expert, Nelson Nash, founded the infinite banking concept in the 1980s. Nash put his years-long experience and financial expertise into developing the system. Further, published the book ”Becoming your own banker”, which remains the first resource about infinite banking.
Struggles with high-interest rates on commercial bank loans motivated him to help himself and other people and develop the most efficient investing strategy.
We highly recommend reading ”Becoming your own banker” because it provides information about using a dividend-paying whole life insurance policy.
Numerous reviews speak of the quality and adoration of this book. Whether you are more interested in car financing or designing an insurance plan, you are sure to find some practical advice applicable to your situation.
How Does Infinite Banking Work?
Some of the characteristics why this approach was attractive to people:
- The exceptional efficiency of the tax system.
- An interest rate that is competitive depending on how stable it is, no loss of value,
- The ability to use the money for life insurance policies and other places.
We can use a whole life insurance policy as payment for the family after the policy holder’s death, but it offers so much more than that.
Much better is to use your whole life insurance policy during your lifetime. It is intended to be used in various life situations – whether you have suddenly lost your job, need a new car, or perhaps a share to buy a house.
When you need money, you borrow the amount of your policy’s cash value. It is this approach that has enabled a significant increase in liquidity.
Although having a life insurance policy does not mean you utilize the infinite banking system, you can choose that additional service. It is rather a tool in your toolbox instead of the toolbox itself.
If you choose a participating life insurance policy, you will constantly earn dividends into your account. Dividends gain help your cash value to expand to premium dollars. Cash value provides you with life insurance loans. Your policy loan can be used for unexpected expenses, generate passive income, and achieve financial freedom supremely.
In simple words, infinite banking involves:
- Overfunding from a life insurance policy a high cash value,
- Accumulation of cash value,
- Tax-free loans.
Infinite Banking Is Not an Investment
It’s crucial to understand that the infinite banking concept is not like traditional investing (stocks, bonds, real estate, or others). Some people turn out to be unsatisfied with this banking concept because they expected the same return as investing in other vehicles.
The most significant differences between investment vehicles and infinite banking are stability and portfolio. Over-funded life insurance provides you with more stability than any other investment vehicle. On the other hand, you cannot diversify your portfolio.
Another thing you cannot achieve with this strategy is to make money rapidly. Infinite banking is made for controlling your money and eliminating money leaks from your economy.
The Role of Whole Life Insurance in Infinite Banking
Another important distinction is that infinite banking is not equal to whole life insurance. We can understand whole life insurance as a tool we use to mirror the banking system with our own money.
Where does the infinite banking system start?
Firstly, every time you make a premium payment, one of its segments is put on the road to savings. That segment of your policy is called cash value.
The cash value compiles a taxed-free rate with every payment you make. The accumulated cash value can be used whatever your needs are.
You can utilize it for various things – from debt payoff to advance your retirement income or purchasing more insurance with a higher life insurance death benefit.
At this point, your infinite banking system starts.
The money is available to you through withdrawal or a loan. Maybe a better option is to access cash by the loan because, in that case, it does not disturb the sophisticated interest in the policy.
One more choice you need to make is whether you want participating or non-participating whole life insurance.
With the participating type of whole life insurance policy, you can receive dividends depending on the insurance company’s profits. You do not receive dividends if you choose non-participating whole life insurance policies.
The advantage of participating policy is if you use it for infinite banking, your cash value will increase every time the life insurance company pays dividends.
Pros of Infinite Banking
If you are willing to be a responsible and goal-oriented individual, this might be the best financial strategy for you.
There are reasons why are cash value life insurance is becoming that popular, and we highlighted the most important benefits.
Liquidity and Cash Flow
In this strategy, you do not need to deal with traditional banks, and it is a reason for better improvement in your cash flow.
Liquidity is another beneficial aspect of this kind of strategy. Whole life insurance is a significantly more liquid asset than the others (real estate, stocks, and 401(k) plan or IRA).
Because of its liquidity, it can act as an emergency savings account. Whatever the crisis is, a life insurance loan can solve it. And it does not have to be a bad situation; you can even use your policy to pay for a holiday, continue schooling, or whatever you want.
Control derives from the insurance’s very low risk.
Tax advantages and asset protection are the two categories that infinite banking offers.
Likewise, there are tax-free policy loans and tax-free growth of interest and dividends, as well as the death benefit of a policy is tax-free.
Cons of Infinite Banking
Even though there aren’t many disadvantages, some may be decisive for giving up this method.
Sure thing it’s sound amazing to be your own bank, but because you need to qualify for a life insurance policy, it is not the option for everybody. Your qualification depends on your age and health.
Mindset and Discipline
It is everything but easy being responsible for your future. It would be best to define financial goals, develop a well-built plan, have strong self-discipline, and primary be a good banker.
Yes, monthly payment is much more expensive compared to other insurances. Despite that, you have to scale what you get with the money you spend.
Besides insurance, you are in commitment to one portion of the policy put into ‘savings’ and still save interest rate and potential dividends.
If your lifestyle is to live paycheck to paycheck, infinite banking is not an ideal option for you.
A critical remark is a living benefit, not the death benefit.
The Resemblance Between Velocity and Infinite Banking
These strategies require powerful will and discipline. We have a lot of examples where people did not pay back policy loans and ended up losing money instead of growing their wealth. Maybe it seems like a simple request, but it is something you need to think through because, in the end, it is a long-term management strategy.
Velocity Banking vs Infinite Banking Comparison
Many people make a mistake with velocity banking thinking that the increase in value (in this case, the house) depends on capital. The opposite is true. The property itself earns, not your capital. Thus, velocity banking does not give you a rate of return.
This is the place where infinite banking brings victory. Not only that cash value life insurance gives you a positive return, but it is also consistent and predictable.
You make returns simultaneously because your cash value continues to earn a return even when you borrow against it.
Unlike velocity banking, infinite banking puts you in control. We already mentioned that you have access to your cash and control thanks to contractual guarantees. Velocity banking is much riskier.
Velocity banking is much more prone to failure for a variety of reasons. You may find the numbers won’t work out if the interest rate change or the housing market drops, or even if your cash flow changes.
The only result of velocity banking is your cash put to home equity, nothing more.
How to Realize Financial Freedom
After reading this article, we hope that the upsides and downsides of the infinite and velocity banking concept are more evident to you. You can have control over finances with either of the financial strategies, but one of them will fit your needs better.
Although everyone has individual ambitions and needs, some goals are common.
Both infinite and velocity banking offer financial freedom by their way of functioning.
However, our final verdict is that infinite banking stays the number one strategy for gaining financial freedom. Reasons are plenty; the most important one is that, unlike velocity banking, infinite banking maximizes your control.
The most significant disadvantages of velocity banking are not being able to access money when it suits you and the lack of a positive cash flow. Likewise, there is a higher chance of losing money this way.
However, suppose these characteristics are not a problem for you. In that case, you can undoubtedly get a significant thing with a velocity banking strategy – repaying the entire mortgage in a period of 5 to 7 years and with less interest. For some, that debt reduction is worth sacrificing other things.
The good thing with velocity banking is the lower interest payment by paying off liabilities, which can also cause free cash consumption.
However, if your goal is not to pay off the mortgage, with infinite banking, you can build cash value life insurance by using your free cash. Most of us want to create as much cash flow as possible and pay off the debts gradually.
We hope we showed you through this article that financial freedom is possible and achievable.