by Homer Dennis
If you think that velocity banking is the name of a bank, then you should read more information and financial news. It is a way for people to pay off their mortgage without having to spend years or even decades. If you do it right and you make the sound plan as planned, then you should be able to pay off the mortgage without having to spend at least 10 years in doing so. So, what do you need to know about it?
As it was mentioned before, one of the many benefits of using the service of velocity banking is to pay the mortgage faster than it was planned before. It may seem like an ideal repayment strategy, right? Who doesn't like to be able to pay off their mortgage faster than it should have? However, there are some required conditions to make sure that such a payment scheme is met (and also possible).
If you have a mortgage, you know that paying off the monthly payment can be quite a burden - not only for your peace of mind but also from the financial side. It takes a very disciplined and dedicated manner to make sure that the mortgage will be paid off just well right in time. That's why most people would take a long period of time (for the repayment) to make sure that they have the needed time for the payment and they also have the funds to cover it. However, not everyone is happy with such a long payment scheme. In some cases, people may experience changes in financial well-being, leading to them having more extra money to spend. Because of it, they are thinking about paying off their mortgage faster than planned, and this is when the velocity banking can be quite useful and handy.
In this velocity scheme banking, you need to open HELOC or Home Equity Line of Credit. Once it opens, it will be your main checking account. In this account, you will use it to deposit your monthly income (as well as paying off expenses). Once you have opened the HELOC, you need to make a lump sum payment to the mortgage account within the HELOC's limit. Lump sum payment is when you make a rather large amount of one-time payment instead of paying the installment (or several smaller payments). You should able to pay the outstanding balance. For those months, HELOC will be your completely main checking account so any income or expenses will be done through the same account. When you manage to pay off the balance, the process can be repeated again (yes, it means that you will have to make another lump sump amount and payment) until all of the mortgages have been paid off.
If you are still confused with the concept of velocity banking, here is an example case: Let's say that you have a current $100,000 mortgage and the APR is set around 5%. Your real estate has an appraised value reaching $125,000 with $25,000 for the equity. Your monthly income is $4,000 with $3,000 for the expenses it already includes a monthly mortgage of $567. Basically, you have an extra income of $1,000.
If you are going to use HELOC for the main checking account, it means that you will get a checkbook and a debit card issued by the financial institution. It means that you will have to inform (and work together with) your employer to direct the deposit to HELOC account. You need to figure it out soon so the repayment scheme can start. In most cases, the financial institution may offer a 90% ratio for LTV (Loan to Value) for HELOC.
If we continue from your previous example, it is likely that your bank may offer $112,500 for HELOC which is based on the appraised value. Here is the calculation: you need to subtract the currently owed mortgage from the appraised value. So, it will be $112,500 - $100,000 resulting in $12,500. It will be your approved HELOC. Don't forget about 7% APR for the balance.
Here is the basic scheme:
Your mortgage balance will be $94,000 with a HELOC balance of $6,000, resulting in a total debt of $100,000. Now since your HELOC account has the $6,000, you can make lump sum payment until that $6,000 is paid off. For now, that amount of money will be your primary amount of the mortgage. As you can see, your $3,000 expenses already include the monthly payment of $567. But with the HELOC account, you can deposit more to the account. Basically, if you do it right, you should be able to pay off the $6,000 debt within 6 months only. You are making lump sum deposit and expenses while making sure that you deposit more to the account - leading to the faster mortgage payment.
With the velocity banking system, you should be able to pay the planned number in record time, but you also make sure that the mortgage repayment is actually going down every time. For the next payment, your sheet will be:
Your mortgage will be $86,783 with a HELOC balance of $6,124 making up a total $92,907 (the 7.09% paid off).
The next one, your mortgage will be $55,017 with a HELOC balance of $6,819, making up a total of $61,836 (38.16% paid off).
If you are able to do this cycle continuously for the next 2,5 years, you should be able to find out that your mortgage balance is lower than taking the minimum monthly payments. If you are able to do this consistently, you should be able to pay off the mortgage within 'only' 77 months - or around 6 years and 5 months. Not only you can enjoy shorter payment time, you basically only around $17,468 for the interest.
As you can see from the scheme above, velocity banking seems to promise a lot of benefits. You may like the idea that you can save a pretty a lot of money for the interest as well as enjoying the shorter mortgage period. Whereas most people may believe that they need to have at least 10 years to complete the mortgage, you know it better, right?
You need to remember that different people may have different preferences and opinions. Whereas some people may like this system, others may like the regular and traditional method. You should ask yourself whether velocity banking will be the right method for you.
If you are the type of person who has a steady income and you always have an extra (money) by the end of the month, then the velocity banking may be the perfect option for you. Basically, the service is meant to 'force' you to have an extra on a monthly basis so the money can go straight to paying off your mortgage. When there is enough money going to HELOC account, you can make lump sum payment repeatedly, resulting in faster debt repayment. Of course, you also need to consider several factors, like your cash flow (the F flow of income and expenses), HELOC interest rate, your financial condition (and its stability), and the early terms (for the repayment) for the mortgage.
This strategy is liked by those who want to repay their mortgage early and they have the extra money (after being reduced by the monthly expenses). However, you should also consider the fact that you can't predict emergencies. And if such an event happens, you need to make sure that you have the extra funds for the rainy days. If you don't, then you can really have a difficult and serious situation.
Although some people say that you can always use the HELOC account for an emergency, others don't really agree. They argue, what's the point of setting up and using HELOC account from the beginning? If you are going to pay off your mortgage fast, then you should dedicate your account for the mortgage payment only. As it was mentioned before, if you have a certain emergency situation, then you should come up with another plan - and another budget.
You need to remember that velocity banking has its own requirements to make it ideal as a form of repayment. Yes, it may seem like an ideal way to pay the mortgage but then again, it isn't for everyone. Your friend may have tried it but it doesn't mean that it will be ideal for you too. Is it effective enough for paying off the mortgage? Yes, it is. Will it be able to help you with your mortgage scheme? Only if you do it right - and you are disciplined enough to do it.
The biggest advantage of having this kind of repayment is the early mortgage pay off. This is one strategy that can work in the customer's favor to repay their mortgage efficiently. Customers won't have to deal with the minimum mortgage payment on a monthly basis. They are 'forced' to increase their deposit and also their repayment time so the mortgage can be settled in the earliest period possible.
Second, you have the ability to free up equity. In the regular mortgage scheme, you won't be allowed to have direct access to equity. However, the HELOC account has a different scheme. With the account, you are allowed to tap into the equity while still be able to streamline the mortgage payment smoothly (and on time). Moreover, this kind of mortgage repayment allows you to pay less interest. This is possible because the method allows free cash flow which affects the mortgage period and length of time. Basically, your mortgage period will be shorter, which affects your less interest rate because of the reduced principal amount being owed.
Fourth, you can gain quick access to cash. This is especially important and handy when you have something unexpected to access. HELOC account is designed to accommodate more money - which can be used for mortgage payment as well as the extra money. However, some people have different opinions about this benefit. Some people really dedicate the account for mortgage repayment only. For them, what's a use of the account if they can still use it for other usages?
Everything has its own good and bad, and so does this velocity banking. You have learned about the positive aspects, but what about the negative sides? First of all, you may dislike the fact that HELOC has adjustable rates. It is quite common that most financial institutions offering a HELOC scheme may offer a fluctuating rate. They don't offer a fixed rate - which can be a problem for most customers. A lot of people don’t really like the fluctuating rates because it creates uncertainty for their mortgage. How If they are able to pay it off this month but not in the next 3 months when the rate rises up? This is the kind of uncertainty that most people try to avoid.
Second, you need to have a good credit score. Setting up a HELOC account requires a good score – something that not everyone has. In most cases, they may not qualify for HELOC because of the not-so-good credit score. The problem is, a lot of people have a tough time managing a perfect score while others may try to recover from the previous failure. If this is your case, you may have a difficult time with it. Third, this kind of scheme requires an individual with extra money. If you have a bad financial management habit or you are often left without any extra money by the end of the month, then this repayment scheme isn't for you. In fact, it will be super bad for you.
Moreover, you also need to consider the mortgage balance versus appraised value. When you apply for the HELOC program, the financial institution will have to check on the property's appraised value. In the event the housing market is down, you may actually owe more than the real value is. This is one delimiting factor in a HELOC account. Moreover, to qualify for the program, you need to take the regular program for some time before applying (and considered qualified) for the HELOC program.
You need to be careful of this scheme often used by MLM programs. There are many cases where Multi-Level Marketing schemes will try to lure clients who want to complete their mortgage payment soon without fuss or hassle. This is a type of scheme that involves course offer or sale or to connect you to a bank (and they get a commission for doing so). In reality, learning about velocity banking is free. You also want to be aware of banks that would pay someone to get customers. When you find the terms of finance and MLM are within the same sentence or program, then you can be sure that there is something fishy about the whole scheme.
Not everyone has positive opinions about this mortgage payment scheme. A lot of people dislike the negative aspects - the fluctuating rate, the risks, etc - and they prefer playing it safe. Moreover, some people have these ideas about the repayment scheme:
• They dislike the fact that they have to pay off more interest payments for a certain period of time. Why not dedicate more money, if they have, in a disciplined manner without having to set up the HELOC account? In this manner, they won't be bound by regulations and strict rules? They are also free to manage their payment without having to worry about anything else?
• They dislike the fact that they may have to face unexpected situations that require them to spend a lot of money.
• Most people don't like the fact that they need to devote most of their extra money for paying off the mortgage only. A lot of people think that they can make use of the extra money to invest (possibly buy another property) instead of paying off one property only.
• A lot of people believe that making the extra payment to the regular mortgage payment should be enough to help you pay off the debt earlier.
• Most people believe that channeling most of your extra money for paying off the mortgage only isn't the wisest move because it doesn't give you the opportunity to invest or make use of the money for other things.
• If you do have the extra income, having one HELOC scheme may seem like a good idea. But if you have several HELOC schemes, it may actually give you a financial burden.
In the end, the decision to determine which mortgage payment scheme to fit your needs depends on your preference and also personal situations. You should be honest to yourself about your condition. Only by doing so you can make a wide and educated decision about which scheme will be the best for your needs. You should also need to think seriously whether velocity banking is the best for your needs or not.
About Homer Dennis
Born and raised in an environmentally conscious family, Homer developed a strong awareness of the impact of human activities on the planet from a young age. This early exposure to eco-friendly practices and sustainability principles inspired her to pursue a career focused on promoting renewable energy and advocating for a more sustainable lifestyle.