Velocity Banking Explained: How It Works + Should You Do It

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No one likes making a mortgage payment every month, or owing hundreds of thousands of dollars on a home.

But despite the fact that millions of people are searching for ways to pay off their mortgage ahead of schedule and get out from under that debt, there are relatively few legit strategies for doing so, aside from simply paying more than the minimum each month.

One of the methods that’s getting attention these days is an approach known as velocity banking, which is sometimes said to allow you to pay off a 30-year mortgage in as little as five to seven years. 

Velocity banking involves using a home equity line of credit (HELOC) to pay off your mortgage faster than you otherwise would. That means you’re using debt to pay down debt, which is usually a cardinal sin in personal finance. 

Still, we wanted to take a deeper dive into this increasingly popular strategy to see whether it’s a responsible and effective way to save money.

Key takeaway: Velocity banking will not save most people money in most situations. It can work when interest rates are very low, or when you have a substantial amount of positive cashflow. But as the examples in this article show, it’s usually more hassle than it’s worth. If your goal is to pay down your mortgage, the wiser choice is to make additional payments each month with your positive cashflow. 

Velocity Banking Strategy Explained

The concept is called “velocity banking” because it can help to increase the velocity (or speed) of your mortgage debt payoff. It facilitates this by allowing you to pay down the mortgage principal balance in large chunks instead of bit-by-bit as you normally would. 

Velocity banking is complicated, which is one of its downsides. There are a number of moving parts, as well as certain requirements that limit the number of homeowners who can utilize the strategy. 

In order to leverage velocity banking, you need the following:

• Equity in your home.
• A solid credit score (680 or better).
• A credit card for your normal living expenses.
• Consistent, positive cashflow (meaning your income exceeds your expenses each month).

You don’t need a huge amount of equity in your home, but you need enough to be able to qualify for the HELOC (which is essentially a credit line that you take out using your home as collateral). 

That said, having more equity will allow you to get a larger line of credit, which can help to accelerate your payoff progress.

Why Try Velocity Banking?

The main problem with a 30-year mortgage is that you’re paying down a very small amount of the principal for the first 10 years or so, because the vast majority of your regular monthly payment goes towards interest. 

To illustrate this, the table below shows the payments for a $400,000 mortgage with a 6% interest rate. It then lists how much money goes toward the loan itself, and how much goes toward interest, at the end of each of the first five years:

As time goes by, more and more of your payment gets applied to the principal. But it takes a long time before you’re making noticeable progress, which becomes evident when you compare the numbers in the table above (the first five years) to the numbers in the table below:

On paper, velocity banking allows you to quickly reduce the balance of the mortgage by paying down the principal in bigger chunks.

In other words, the faster you pay it down, the less you’ll pay in interest overall.

Getting Started With Velocity Banking

Here’s a step-by-step example of how velocity banking works. 

• Step #1: Open a home equity line of credit (e.g., take out a $20,000 HELOC).
• Step #2: Use the money from that HELOC to pay down your mortgage by $20,000. In other words, you’re replacing the mortgage debt with HELOC debt.
• Step #3: Here’s where the “banking” aspect comes into play. You use the HELOC as if it were a checking account. When you’re paid by your employer, you immediately deposit those funds into your HELOC account, using all of your take-home income to pay down the balance. Since interest on a HELOC is typically calculated daily on the outstanding balance, depositing your income reduces the interest charges.
• Step #4: Throughout the month, you pay for all of your living expenses with a credit card. This technique leverages the grace period of the credit card (the time during which no interest is charged if the balance is paid in full by the due date) to maximize the use of every dollar.
• Step #5: Once per month, you use the HELOC to pay both the credit card balance and your regular monthly mortgage payment.
• Step #6: Since you have a positive monthly cashflow (one of the requirements for this strategy to work), you’re paying down the balance of the HELOC every month. So once the HELOC balance reaches $0, you make another $20,000 payment from the HELOC to the mortgage and start the process all over again.

Eventually, you’ll pay off the balance of the mortgage, leaving only the remaining HELOC balance to deal with.

Once that’s paid off, you’ll own your home free and clear.

Velocity Banking Example

The best way to explain the potential savings offered by velocity banking is through an in-depth example. So far, we’ve just scratched the surface. 

For our example, we’ll use the following figures:

• Original mortgage amount: $400,000.
• Interest rate: 6%.
• Term: 30 years.
• Monthly mortgage payment: $2,398.20.
• HELOC amount used for “chunk” payments: $20,000.

In addition, we’ll use the following variables:

• Home value of $500,000.
• $10,000 after tax take-home pay.
• $2,000 of free cash flow each month (i.e., $8,000 in monthly expenses).
• HELOC interest rate of 8%.

Here’s how this would work:

1. You take out a $20,000 HELOC and immediately apply that money to the mortgage balance. Now your mortgage balance is $380,000, and the HELOC balance is $20,000. 
2. Your monthly income is $10,000, and your monthly expenses are $8,000. You deposit your entire $10,000 of income into the HELOC account, which reduces your HELOC balance to $10,000.
3. Throughout the month, you charge $8,000 worth of expenses to your credit card. When the credit card bill is due, you use $8,000 from the HELOC to pay off the credit card balance. This brings your HELOC balance back to $18,000 ($10,000 + $8,000).

With positive cashflow of $2,000 per month, it will take you 10 months to pay down the HELOC to a $0 balance. 

At that point, you start the process over by taking another $20,000 from the HELOC and putting it towards the mortgage balance, with the goal of repeating this cycle every 10 months.

In the meantime, you continue making your regular monthly mortgage payments, which will also help pay down the balance.

How much does velocity banking save you? 

For a $400,000 mortgage at a 6% interest rate over a 30-year term, making only the minimum monthly payments, you’d pay a total of $463,352.76 in interest over 30 years. 

When you use velocity banking, using the hypothetical numbers above, you would pay:

• Total mortgage interest paid: $125,687.76.
• Total HELOC interest paid: $8,800.
• Combined total interest (mortgage + HELOC): $134,487.76.
• Time to pay off: 120 months (10 years).

A total savings of $328,865, right?

Unfortunately, the answer is “no.” 

It makes no sense to compare velocity banking to making minimum monthly payments, because of course you’re going to pay off your mortgage faster if you pay an extra $2,000 per month. 

You need to figure out how much velocity banking would save you compared to using your free cashflow ($2,000 per month) to make additional mortgage payments directly.

Here’s what the numbers would look like if you made additional monthly payments of $2,000 per month until your balance is paid off (instead of using velocity banking): 

• Total interest paid: $134,816.58.
• Time to pay off: 122 months (10 years and 2 months).

So, after all of that effort, you would end up saving just $328.82.

The video below does a great job of explaining in more detail what most proponents of velocity banking get wrong.

Velocity Banking Drawbacks

While the example above shows there’s not enough savings for velocity banking to make sense, there are still other major drawbacks that you need to be aware of:

• It’s not an option for everyone. If you don’t have equity in your home, don’t have good credit, or don’t make more money than you spend each month, velocity banking won’t work for you.
• It’s complicated and takes long-term effort. It can take a while to wrap your head around the concept of velocity banking, including how it works and why it works. And once you understand it, putting it into action requires some extra effort as well. Financial strategies that are complicated usually don’t work out for most people.
• It opens up the possibility for more debt. Taking out a HELOC gives you access to money that you can spend in any way you want. If you make a bad decision or incur an unexpected expense, you might wind up not making any progress (or even adding to your debt).
• It requires serious discipline. Don’t attempt the strategy if you struggle with financial discipline. Things in your financial life, and life in general, won’t always go as planned. It will take discipline to stay with the plan and stay on course over a period of time.
• It requires singular focus on your mortgage payoff. In this strategy, you’re using all of your money supply each month to pay down the HELOC and the mortgage. That’s great, but what about other financial goals, like saving and investing?
• HELOCs have variable interest rates. Back in 2021, when many of the million-plus-view YouTube videos on velocity banking were created, interest rates were historically low. Of course, they’ve gone up since then. If you started using a HELOC for velocity banking in 2021, you’re probably paying significantly more in interest now. This means it could take longer and cost more to pay off your debts using this strategy. So, be aware that rising interest rates can make velocity banking with a HELOC more expensive and riskier.
• The models and examples you’ll find online are usually best-case scenarios. In the example above (and the examples you may find on other websites), the numbers illustrate an ideal scenario that is unlikely to play out in reality. We all know that life doesn’t go as planned and that unexpected things come up. The models and examples don’t account for these situations.
• Scams exist. There are a number of companies and individuals offering software or some other assistance that’s supposed to help you implement this plan. In some cases, they’re selling for a few thousand dollars. You don’t need to pay for any of these services in order to use velocity banking.

Will Velocity Banking Actually Work for You?

At this point, we’ve covered the concept and looked at an example. But your situation may be different. Maybe you have more cashflow. Maybe we’re in a better interest rate environment than when I conducted my original analysis. 

Here are some questions to ask yourself before proceeding.

Question #1: How much positive cash flow do you have?

If you only have a small amount of excess cash left over each month, velocity banking will not speed up the process very much and it will probably be more hassle (and more expensive) than it’s worth.

Question #2: Is paying off your mortgage ahead of schedule your best long-term financial move?

So far we’ve been looking at this topic from the perspective of attempting to pay off your mortgage as fast as possible. But it’s important to determine if that’s actually in your best interest. 

There are a number of reasons to pay off a mortgage. Aside from the financial benefit of being debt-free, eliminating the monthly mortgage payment can help to reduce stress and anxiety related to money. 

However, on paper it usually makes more sense to pay your mortgage on schedule and use any extra money to save and invest. The interest rates on mortgages are typically low, and for some people there will also be tax benefits.

Question #3: What is the interest rate of the HELOC?

The interest rate on a HELOC will typically be higher than the rate on a first mortgage. The amortization and calculation of a HELOC will be different than a mortgage, so it’s not comparing apples to apples, but the higher the interest rate on the HELOC, the less likely that velocity banking will be effective for you.

Question #4: Is the HELOC rate fixed?

Most HELOCs have a variable interest rate, which could increase at any time. If you get started with velocity banking and your interest rate goes up, it will throw off your calculations and require more time to pay off the debt.

Question #5: What are the additional costs associated with your HELOC?

Are there fees or other costs of the HELOC that need to be considered?

Question #6: What are your other sources of emergency funds?

This will not be relevant for everyone, but some people use a HELOC as an emergency fund. If that’s your approach, you’ll need to consider what will happen if your HELOC is maxed out and an emergency arises. 

Velocity Banking Alternatives

Here are some other options you can consider if velocity banking is not right for you:

• Make extra payments as you’re able. You can pay extra on your mortgage at any time and it will be used to pay down the principal. If you pay extra each month (or whenever you’re able), it can make a real difference.
• Bi-weekly payments. Another common “trick” for paying off your mortgage early is to make payments every two weeks instead of every month. You’ll make 26 payments throughout the year, equaling 13 months’ worth of payments. That extra payment will go towards the principal and allow you to cut about two or three years off of a 30-year mortgage. It’s nothing drastic, but it’s an easy way to have an impact.
• 15-year mortgage. If you’re just buying a house now (or refinancing), you can opt for a shorter term, like a 15-year mortgage. It will increase your monthly payment, but you’ll save a huge amount of money in interest and a much larger percentage of your monthly payment will start going towards the principal right away.
• Pay on schedule. Of course, another option is to not pay your mortgage off early and use the extra money for other purposes, such as investing.

Velocity Banking FAQs

The Bottom Line on Velocity Banking

If you’re highly motivated to pay off your mortgage and have determined that it’s the right financial move for you, instead of using velocity banking, it’s best to pay down the principal directly from your mortgage.

Even if your financial situation means velocity banking makes more mathematical sense, it still relies on many assumptions. For example, it depends on you having positive cash flow month in and month out, with no exceptions, until your mortgage is paid off.

That’s a pretty big assumption. And if something changes, you risk carrying high-interest HELOC debt rather than lower-interest mortgage debt. 

When you factor in this risk, the savings of velocity banking compared to paying down your mortgage principal monthly would have to be substantial. 

At the end of the day, the numbers simply don’t support the use of the strategy.

R.J. Weiss

R.J. Weiss, founder of The Ways To Wealth, has been a CERTIFIED FINANCIAL PLANNER™ since 2010. Holding a B.A. in finance and having completed the CFP® certification curriculum at The American College, R.J. combines formal education with a deep commitment to providing unbiased financial insights. Recognized as a trusted authority in the financial realm, his expertise is highlighted in major publications like Business Insider, New York Times, and Forbes.