I’m going to discuss a complicated topic referred to as Velocity Banking where you use a variable interest Line of Credit against your home to actually pay off your mortgage faster (like in 5 years or so). When I was doing my research on this, none of the articles or videos stated it that plainly. I suppose because it immediately draws too many questions and skepticism, but that’s really what it is.
While doing my research, I didn’t find many personal experience blogs from someone who seriously considered it and did not pursue it (this is what I will address). It seemed people either didn’t fully understand the concept, fully understood it and were educating others, or incorrectly understood it and believed it to be flawed. A lot of the people who fully believed in the concept were people selling software or consultants on this method which is not as trustworthy in my opinion.
Before spending time explaining this concept, here’s my summary of who should even consider this. I would have really appreciated a chart like this before I spent hours researching, and even time with an actual consultant to simply get the information below. You would have to meet everything on the left hand side, and none of the items on the right to make this method work for you.
| Right for You | Not Right for You |
|---|---|
| You have equity on your home | You recently purchased your home |
| Income to Debt Ratio will allow you to borrow more | You have other debt to pay off |
| You have a good Credit Score | Need to save more/Don’t have Emergency Fund |
| You Spend Less than You Earn | You have vary variable income or expenses |
| You are disciplined about credit lines and budgets | Never managed expenses on a Credit Card |
| If in Texas (perhaps other states), you live in your HELOC Home | Your equity is on a Secondary Home or Investment Property |
I decided to write about my experience since I didn’t find too many personal reviews. If it’s not already obvious, I’m not a financial advisor or in any way credited to tell you what you should do with your finances. I’m simply here to share what I learned and my experience.
I will caveat that I do now work for a bank (in corporate and nothing to do with loans or mortgages), but I wrote this draft before I started working at a bank, so again, I’m not qualified and only sharing my personal experience as a consumer.
I’ll now try my best to give a short summary of the method, and then explain my table further. There are some in-depth videos like this one and this one that will do a much better job at describing this method. I recommend watching those, but beware, these are all from people selling software or their consulting service.
Here’s my summary: The HELOC (Home Equity Line of Credit) is used like a checking account (the way some people use credit cards for all their expenses and then pay them all off each month) in order to make lump sum payments to their mortgage. So, the method will have you use the line of credit (i.e. $12,000) to make a lump sum payment to your mortgage, and then deposit your whole income check (i.e. $5000) to pay off some of the line of credit, and give you a buffer to then use that it to pay for your monthly bills (i.e. $3000) including your monthly mortgage payment, car payment, etc. The reason your expenses need to be lower than your income (in general and always), but specifically for this method is so that the Line of Credit is paid down by that buffer (i.e. $2000) while the Line of Credit itself pays down your mortgage and calculated interest.
Again, I am not an expert. I am simply sharing my experience and research. However this could get lengthy, complicated, and boring, so a Q & A format seems best, but by no means take this as an expert response.
How does the lump sum different than just making an extra principle payment?
The difference is that the lump sump reduces the daily calculated interest which is something an extra payment cannot do.
What size Line of Credit could I expect to get?
It’s based on the equity on your home, credit score, debt to income ratio (how much you owe total vs. how much you make), and the bank you choose.
How can you use a loan to pay for your daily expenses?
This is where a consultant could help as I did not end up actually pursuing a HELOC and do not know the details. It seems there are certain financial institutions that will give you a debit card to use against your loan for expenses or to use for reoccurring bills.
Why can’t I Save while doing this method?
Technically you can, but the progress (gap between your income and expenses) will significantly decrease which is what helps you pay off the mortgage. It seems having that emergency fund or whatever else you need to save for established should be accomplished first before pursuing this method.
Are HELOC’s only for Primary Residencies?
At least in Texas, this was the case. Regardless, I’d imagine you would have to have an incredible financial situation to allow a bank to allow you to borrow against your investment or secondary home as that would be more risky.
Why didn’t you pursue the HELOC/Velocity Banking method?
The home I had the most equity on is in Texas where I do not reside. In addition, I have student loans that I am trying to actively pay off, so mortgage payoff is not currently a priority.
Please let me know if you have any questions for me or someone else who can respond to your questions. Also I’d love to hear from personal experiences who have used this method as that was literally impossible for me to find or trust when I did.