Debt Payoff

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

How Velocity Banking Works
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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:

Payment NumberTotal PaymentPrincipal PaymentInterest Payment
1$2,398.20$398.20$2,000.00
12 (Year 1)$2,398.20$420.66$1,977.54
24 (Year 2)$2,398.20$446.60$1,951.60
36 (Year 3)$2,398.20$474.15$1,924.05
48 (Year 4)$2,398.20$503.39$1,894.81
60 (Year 5)$2,398.20$534.44$1,863.76

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:

Payment NumberTotal PaymentPrincipal PaymentInterest Payment
120 (Year 10)$2,398.20$720.88$1,677.32
180 (Year 15)$2,398.20$972.36$1,425.84
240 (Year 20)$2,398.20$1,311.57$1,086.63
300 (Year 25) $2,398.20$1,769.11$629.09
360 (Year 30)$2,398.20$2,386.27$11.93

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

Can you implement a velocity banking strategy with a credit card?

Yes, it’s possible to implement the strategy by using a credit card and balance transfers instead of using a HELOC. However, it adds a little bit of complexity and it may require you to churn credit cards and move from a card before its 0% introductory rate expires. It also increases the need for discipline to avoid high-interest debt on the credit card.

Is velocity banking the same thing as infinite banking?

No, the two concepts are different. Infinite banking involves using life insurance policies that pay dividends with the goal of essentially becoming your own banker by borrowing against the cash value of the policy. Read our critique of infinite banking to learn more.

What does Dave Ramsey say about velocity banking?

Dave Ramsey is not a fan of the concept, and more specifically, he’s not a fan of the people and companies trying to sell software or a service that will help you with velocity banking.

“If you want to pay extra payments on your first mortgage, you have to live on less than you make. If you borrow money on the home equity line of credit to pay money down on the first, you broke even, didn’t you? That’s borrowing from Peter to pay Paul,” Ramsey says. “That’s stupid. What they’re saying is that they’re going to assist you in managing your money better, and they’re going to charge you $3,500 for all this gyration. It’s a bunch of crap.” (Source.)

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.

    31 Comments

    1. Excellent analysis on the velocity banking. Fair and objective. Thank you Marc.

    2. Your analysis, pros, cons, and alternatives were crisp, to the point, and saved me from listening to a breathless infomercial about the subject.

      Thank You,

      Steven G

      1. Thanks Steven!

    3. Very good explanation without bias. In everything I read so far, you can see their personal opinion. Thank you!

    4. This was the best article I’ve read in three hours on the pros, cons and explanation of the strategy… now, to decide. I want to pay off high interest rate debt before my mortgage. I’m assuming it works the same way. Pay a chunk of debt. Pay it back by using the HELOC as a checking account until you get it down to a good balance again. Then pay a chunk of debt. hmmm.

      1. Hey Jodi,

        My two cents: taking out a HELOC could make sense depending on the amount of credit card debt. Just make sure to account for interest and fees on the HELOC. If it’s not too much debt, I’d just pay it off without the HELOC.

        I then wouldn’t mess with velocity banking. It takes years and a 100% repayment schedule to make the strategy even worth considering. Seeing that you’re currently in high-interest debt, my focus would be more along the lines of the baby steps (https://www.thewaystowealth.com/money-management/dave-ramseys-baby-steps/). Establish an emergency fund, start funding investing accounts, etc.

      2. This is an Excellent article! It describes the concepts, the requirements for using these concepts and the pros/cons. All other articles I’ve read go straight for the hype and present a happy day scenario without dealing with all the must haves in order to make it work and the Pros/Cons. In addition the author presents alternative ways of accomplishing the same goals. Very thorough!

    5. Your explanation about Velocity banking, is the best that I read so far!

    6. Wow, very concise appraisal of velocity banking. Probably the best I have read. No personal bias and BS just the facts. I don’t have much more input but wanted to compliment you on a very good article. Thank you.

      1. Really appreciate the kind words. Thanks.

    7. This article is good, but is missing one more option! Taking out a PLOC of say $10,000.00 (Personal Line of Credit) would be a better approach. Applying the principles you discussed and avoiding HELOC’s variable interest rates is a win/win in my book. Also, don’t forget to mention the REAL interest rates people are paying. First, it’s not SIMPLE interest, like you get with a credit card, and secondly, the REAL interest on a mortgage can be found in the “Closing Documents” of that mortgage. For some loans, it can be as high as 80%

      1. Thanks. Math is going to be a bit different, however, as PLOCs are going to have higher interest rates than HELOCs.

        A quick search found that the US Bank has a HELOC of as low as 8.95%, while the lowest PLOC going is 12.5%.

        1. Which is still lower than the REAL interest rate on the mortgage right or wrong?

        2. How are you calculating the real interest rate? The term is typically used when discussing impacts of inflation on a loan.

          And how is this different from APR, which reflects the true cost of borrowing on an annual basis.

    8. Thank you for clearing my head on this complicated concept for me. I will stick to what I have been doing, paying extra to my principal when I can.

    9. Is there a significant difference between this heloc strategy and simply paying the available cashflow you would use to paydown the heloc towards your mortgage?

      1. Yes, because more of your payment goes toward the principal instead of interest. But, as discussed, this has its risks as well.

        1. Using your example numbers of a $200,000 mortgage balance, a 3.5% interest rate on the mortgage, 30 years remaining on the term, and $1,000 positive cash flow per month.

          If you put that $1,000 every month on the principal, you pay it off in 10 years and 7 months. Total interest of $39,310.37 vs. no additional principal of $123,312.18, which crushes your 17K in savings and 12 and change years.

        2. You’re right. I’m just not sure what were the variables in the calculator we used at the time, as it’s no longer available to double check our work. We’ll need to take a deeper dive into this!

    10. I’m sorry what? The example says the $1000 in positive cash flow will pay the 20k HELOC balance off in 20 months. Then you’re supposed to rinse and repeat. What about the HELOC interest you’ve been accumulating?

      1. Thanks, JB, for pointing this out. Sorry, if you read that and stopped in your tracks, because you’re right, that example doesn’t include interest!

        That was to just conceptualize the general idea.

        We go on to talk below about the variables below that are going to impact the duration to pay off the HELOC and mortgage.

    11. Very good article. Thank you for articulating this method so clearly.

    12. Instead of the chunk payment, you could just pay $1000/month on top of the normal mortgage payment. This isn’t as efficient as the chunk payment, but the difference is small enough that it is worth the ease of execution, cashflow flexibility for unexpected expenses, and preserves the HELOC for other outlier needs.

    13. I found this article after watching a YouTube video on the same topic. Your explanation and breakdown was easier to understand and I like that you also provided the pros and cons. One thing neither of you mentioned, however, is the draw period when only interest-only payments can be made toward the HELOC. In such a scenario, this method is pointless because those 20 payments would go to the interest only, leaving you with the full principal balance once the draw period ends, which can be several years later…Am I wrong in this assumption?

      1. Good question Belle.

        During the HELOC draw period, most lenders only require interest-only payments on the amount borrowed. However, you have the option to pay more than the minimum payment, which would include payments towards the principal balance.

        In the context of the velocity banking strategy, the whole idea is to use the HELOC to pay down the mortgage principal faster by making large, lump-sum payments. If you only make the minimum interest-only payments during the draw period, you won’t be making any progress on paying down the principal, which defeats the purpose of velocity banking.

        Does that make sense?

    14. We have equity, a positive cash flow and credit score of 800. We also have zero credit card debt. We are 13 years into the mortgage and interest and principal are now 50/50. We took a HELOC in 2021 for a new kitchen and owe $65K on it. Is there any value in getting a PLOC to try this velocity banking to knock out the HELOC? We have a $2K/mo positive cash flow.

      1. What are the terms of the HELOC? Interest rates were low in 2021. Is it variable?

        But overall, I would advise most against taking out a personal line of credit to pay off a HELOC. Personal lines of credit typically have much higher interest rates than HELOCs.

        And I just don’t love juggling around debt to try to squeeze a tiny bit of potential savings, knowing that if things go wrong, you could be stuck with more debt.

        You’re doing things right as they are, and if you want to focus on the HELOC, I’d just put all your free cash flow towards it.

        1. Yes, it’s a variable rate. The first $40K was at 3.5%, the rest was at 4.5%.

    15. Is that what the rate is now or what it started at? That’s good.

      But even if the rate was much higher, I still feel this strategy adds complexity to your financial situation and doesn’t necessarily guarantee savings or a faster payoff. Assuming the variable rates are much higher, you don’t want to lose the positive cash flow and can’t pay off the HELOC, leaving you with more debt.

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