No one likes making a mortgage payment every month, or owing hundreds of thousands of dollars on a home. And for many of us, eliminating mortgage debt and owning our home free and clear is one of our most significant long-term financial goals.
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 options or solutions, aside from simply paying more than the monthly minimum.
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 finances.
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.
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 somewhat complicated, which is one of its drawbacks. There are a number of moving parts, and there certain requirements that mean the strategy isn’t an option for everyone.
In order to leverage velocity banking, you need:
- Equity in your home.
- A solid credit score (680 or better).
- A credit card for your normal living expenses.
- 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 the 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.
If you’ve ever looked at an amortization table for your 30 year mortgage, you’ve seen that the vast majority of your regular monthly payment goes towards interest for the first few years, and only a very small amount goes towards the principal.
As the years go by, more and more of your payment goes towards the principal — but it takes a long time before you’re making noticeable progress.
On paper, velocity banking allows you to reduce the balance of the mortgage much faster 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: To start the velocity banking process, you’ll apply for and open up a home equity line of credit. For this example, let’s say it’s a $20,000 HELOC.
- Step #2: You then 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.
- Step #4: Throughout the month, you pay for all of your living expenses with a credit card.
- Step #5: Once per month, you use the HELOC to pay the credit card balance (and also to pay your regular monthly mortgage payment).
- Step #6: Since you have a positive monthly cash flow (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.
There are a few key reasons why the velocity banking approach can work out well.
First, the “chunk” payments allow you to pay down the mortgage principal quickly.
When you pay down the principal ahead of schedule, it impacts the amortization of the loan. The amount of your monthly mortgage payments won’t change, but a higher percentage of the payment you make each month going forward will be applied to the principal rather than the interest.
Second, the HELOC payments are based on the average daily balance.
As you pay down the HELOC balance, the amount of the interest payment decreases. By using a credit card for all of your living expenses, you’re delaying when you actually make the payment. This allows the money to stay in the HELOC longer, and slightly reduces the interest you’ll need to pay on it.
And finally, velocity banking helps you to stay completely focused on paying down your mortgage.
One of the challenges of paying down a mortgage, or debt payoff in general, is maintaining focus and commitment. Velocity banking takes some effort, but the positive side is that you’ll be constantly aware of what you owe on your mortgage and focused on paying it off.
Velocity Banking Example
The best way to explain the concept is through an example.
In this case, let’s assume you have a current mortgage balance of $200,000 and a home value of $250,000 ($50,000 in equity).
Let’s say you take out a HELOC for $20,000 and immediately apply that money to the mortgage balance. Now, your mortgage balance will be $180,000 and the HELOC balance will be $20,000.
You’ll be using your paycheck to pay down the HELOC balance and using a credit card for your regular living expenses. When the credit card payment is due, you’ll be paying the credit card bill with your HELOC.
For this example, let’s say your take-home pay is $6,000 and your monthly living expenses are $5,000 (including your regular mortgage payment). That leaves you with a monthly free cash flow of $1,000. You’ll be paying the HELOC balance down by $6,000 each month, and then using the HELOC to pay $5,000 worth of expenses.
With that positive cash flow of $1,000 each month, it will take you 20 months to pay down the HELOC to a $0 balance. At that point, you’ll start the process over by taking another $20,000 from the HELOC and putting it towards the mortgage balance — and you’ll do the same thing every 20 months.
In the meantime, you’ll continue making your regular monthly mortgage payments, which will also work to slowly contribute towards paying down the balance.
The amount of time it will take to completely pay off your mortgage and the HELOC will vary depending on a few factors, including:
- The interest rates of your mortgage and HELOC.
- The amount of positive cash flow you have each month.
- The size of your HELOC, which impacts the size of the chunks you’ll be paying off your mortgage.
I used a calculator from the website Truth In Equity, entering these details:
- $200,000 mortgage balance.
- Appraised home value of $250,000.
- 3.5% interest rate on the mortgage.
- 30 years remaining on the term.
- $1,000 positive cash flow per month.
The site does not state what interest rate is used for the HELOC or the size of the equity line, but the calculator determines it will take 12 years and 10 months to pay off the mortgage and HELOC.
That would save $17,043.48 in total interest as compared to going through with the regularly-scheduled monthly payments for 30 years.
Velocity Banking Drawbacks
At this point, velocity banking looks pretty good. But while it certainly can work for some people, there are some major drawbacks that you need to be aware of before deciding to go this route.
- 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. Rates are historically low right now. But if they go up, you’ll be paying more.
- 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.
Does Velocity Banking Actually Work?
At this point, we’ve covered the concept and looked at an example. Now it’s time to decide if it’s right for you.
The truth is, velocity banking can work, but it’s not for everyone.
And just because it can work doesn’t mean it’s your best option.
Here are some questions you should ask yourself.
Question #1: How much positive cash flow do you have?
The more positive cash flow you have each month, the faster velocity banking can work for you. With more extra cash, you’re able to pay the HELOC balance down faster and make more chunk payments to your mortgage principal.
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 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.
Velocity banking can work, but it requires mortgage payoff to be your primary focus. The more positive cash flow you have each month, the faster you can pay off your mortgage. But that assumes that you’re putting all of your excess cash towards your mortgage, which means you can’t use it for anything else.
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.
Keep in mind that even if the interest rate of the HELOC is higher than the mortgage, which it usually will be, the concept still works on paper because of the chunk payments, which increase the amount of money going towards principal in the early stages of the loan.
Question #4: Is the HELOC rate fixed?
Many 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: Would you save more by refinancing?
One of the problems with velocity banking is that all of the articles and examples you find will compare the results of velocity banking to the results of doing nothing — or in this case, to continuing with your 30 year mortgage by paying the minimum payment as scheduled.
Yes, velocity banking can speed up your debt payoff and save you some money in interest. But there are other options for accomplishing the same things.
One of the easiest options that should be considered is refinancing. Depending on your situation — when the mortgage was originated, the current balance, home equity and your credit score, for example — you may be able to save a lot of money by refinancing.
Typically, when people refinance they open another 30-year mortgage, which starts the process all over again. This will give you the lowest monthly payment (which is what a commissioned loan officer will probably pitch to you) but it will stretch out the life of your mortgage and increase the interest that you pay over the life of the loan.
If reducing your monthly payment is not your priority, you can refinance for a shorter term, lower your interest rate, pay off the mortgage earlier and save money over the life of the loan — and still have funds to save and invest.
Question #7: 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.
What’s Not To Like About Velocity Banking?
While the velocity banking approach looks good on paper and can work for some people, it’s not a practical solution for the majority.
Not only do you need equity, good credit and positive cash flow in order to even consider trying it, you’ll also need a lot of discipline to carry out the plan.
It may seem like a great plan now and you may be 100% on board, but are you going to feel the same way eight years from now?
On top of all that, emergencies and unexpected events can easily throw a wrench into your plans. Even if you’re fortunate enough to avoid major emergencies, your life situation is inevitably going to change at some point and the plan may no longer be practical for you.
And finally, with interest rates so low today, your best long-term financial move is likely investing money in tax-advantaged accounts like an IRA or 401(K).
Velocity Banking Alternatives
Here are some other options you can consider if velocity banking is not right for you:
- 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.
- 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.
- Refinance. As was mentioned earlier, refinancing to get a lower interest rate and/or shorter term is another viable option.
- 15-year mortgage. If you’re just buying the 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.
Velocity Banking Concept FAQs
Those who have the most extra cash each month will benefit the most because they’ll be able to pay down the HELOC and mortgage faster.
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.
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.
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.)
Final Thoughts on Velocity Banking
Velocity banking is one option that may be able to help you pay off your mortgage faster. It’s not realistic for everyone, it’s complicated to understand and carry out, and it requires serious discipline.
If you meet all of the qualifications and if you’re 100% dedicated to paying off your mortgage as fast as possible, it can work.
But for most people, other options — like simply paying extra on your mortgage or going with a 15 year term instead of the standard 30 year mortgage — will be a more practical and more effective plan.
Excellent analysis on the velocity banking. Fair and objective. Thank you Marc.
Your analysis, pros, cons, and alternatives were crisp, to the point, and saved me from listening to a breathless infomercial about the subject.
Very good explanation without bias. In everything I read so far, you can see their personal opinion. Thank you!
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.
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.