Is Velocity Banking the Fastest Way to Pay Off Your House?

https://www.youtube.com/watch?v=YmwHe1SC70A Want to pay off your house fast?  Considering Velocity Banking? You’re not alone.  So many people are motivated, whether by culture, values, or something else, to pay off their house as quickly as possible.  This desire is completely normal.  But it can leave you vulnerable to some pretty big unintended consequences. When we’re emotionally driven to do something, we can be attracted like moths to a porchlight to anything that promises that thing. When it comes to paying your house off fast, one such “porchlight” is Velocity Banking. The widely promoted strategy of velocity banking to pay off a mortgage uses a HELOC to replace your mortgage and pay off your house, usually within 5 – 10 years, and save interest. The problem is that we can be misled when the messaging hits all of our hot buttons, even if it doesn’t entirely make sense to us.  Save time, save interest? Sounds good, let’s go, right? Unfortunately, math can be used to tell whatever story you want, depending on what information you skip over or leave out altogether. When the claims don’t add up, but we’d like them to be true, we reason that someone else already figured it out, so we can just trust them.  Unfortunately, The lie is easier to tell than the truth is to explain. Todd Langford But when something doesn’t add up, it’s time to dig in and ask questions.  Your questions are likely more valuable than the answers you find. When it comes to your money, you deserve real answers so that you can make informed decisions. That’s why we’re digging into a case study.  We’ll answer the question: What is the fastest way to pay off your house? At its core, Velocity Banking isn’t magic; it’s math combined with leverage and cash flow timing. While the strategy can accelerate mortgage payoff on paper, speed alone doesn’t determine whether an approach is safe or sustainable.  Understanding how the velocity banking strategy actually works helps separate impressive projections from the real-world risks that come with trading predictability for faster payoff. So, if you want to have the most financial control while paying off your house, tune in now! Table of contentsWhere Paying Off Your House Fits into the Cash Flow SystemWhat Is Velocity Banking?The Case StudyA HELOC Is Riskier Than a Typical MortgageRisks of the HELOCVariable Interest RatesHigher Interest Rates Than MortgagesIncreased Payment Required During the Repayment PeriodThe Draw PeriodThe Repayment PeriodExactly What Will This New Payment Be?How Could You Solve This Problem of a Rate Increase?Why Does the Minimum Payment Matter if the Point of Velocity Banking Is to Pay Maximum Payments?Velocity Banking vs. Extra Payments: Which Is Truly Faster?What Is the Safest Way to Pay Off Your House?How to Pay Off Your House Fast and Stay in ControlVelocity Banking Isn’t Magic, It’s LeverageFind Out More: Build a Smarter Cash Flow StrategyBook A Strategy CallFAQsWhat is velocity banking?Does velocity banking work?Can velocity banking be explained simply?Is velocity banking a strategy or a system? Where Paying Off Your House Fits into the Cash Flow System Many people looking at velocity banking to pay off a mortgage are missing where this strategy fits (or doesn’t) in the broader Cash Flow System. Owning a home requires paying for it. And paying for anything, no matter how you do so, affects how much of your money you keep. Making the best financing decisions gives you more to keep and put to work. But no matter how much money you keep, it’s just one small part in the bigger picture of building time and money freedom. That’s why we have created the 3-step Business Owner’s Cash Flow System, your roadmap to take you from just surviving to a life of significance, purpose, and financial freedom. The first step is keeping more of what you make by fixing money leaks, becoming more efficient, and profitable.  Then, you’ll protect your money with insurance, legal protection, and Privatized Banking.  Finally, you’ll put your money to work, increasing your income with cash-flowing assets. Paying off your house happens right here in The Money Finder step of your financial foundation. When you find, recover, and keep more of the money you’re making, you put more gas into your cash flow machine. However, being debt-free isn’t the same as being in control of your financial future. What Is Velocity Banking? At its simplest, velocity banking is a cash-flow management approach that uses a home equity line of credit (HELOC) to accelerate mortgage payoff. Income is deposited into the HELOC, everyday expenses are paid from it, and surplus cash flow is periodically used to make larger lump-sum payments toward the mortgage. This cycle is repeated to reduce interest costs and shorten the loan term. Understanding what velocity banking is also requires clarity about what it is not. It isn’t a method for arbitrage interest rates, and it doesn’t eliminate interest through a special banking loophole.  The velocity banking strategy relies on leverage, timing, and disciplined cash-flow behavior, which is why whether velocity banking works depends heavily on stable income, predictable expenses, and rising risk exposure as balances and rates change. The Case Study We’ll walk through Truth Concept’s report by Todd Langford and Elizabeth Hagenlocher, Are Accelerated Mortgage Programs Using A Home Equity Line of Credit Effective? The full report is available for you at the bottom of this article. The report analyzes a Velocity Banking example where a person exchanged a 30-year mortgage with 25 years left for a HELOC, paid the house off in 10 years and 8 months, and supposedly saved $217,874.12. This is where velocity banking vs. extra payments becomes a real-world decision. In the podcast, we compared and contrasted four options: Paying the existing 30-year mortgage with minimum payments Using a HELOC (Velocity Banking), which included extra payments Making extra payments on the existing 30-year mortgage Paying the existing 30-year mortgage with minimum payments and storing the monthly surplus in a Privatized Banking system Here is what we found: A HELOC Is Riskier Than a Typical Mortgage The crux of Velocity Banking is that you pay off your house fast by making extra payments.  But, rather than making these additional payments on an existing mortgage, you swap out the mortgage for a HELOC.  If you’re comparing Velocity Banking vs. extra payments, it’s important to evaluate the HELOC’s risks and volatility. The stated advantages for using the HELOC over a typical mortgage are that you reduce interest, build equity faster, pay less volume of interest, and can take the money back out if you need it. A traditional fixed-rate mortgage is a closed-ended loan with known terms: the interest rate, payment schedule, and payoff timeline are established up front. A HELOC, by contrast, is revolving credit with a variable rate and changing required payments over time.  Knowing how this structural shift works is central to evaluating how velocity banking works in practice, and why the added flexibility of a HELOC also introduces uncertainty that doesn’t exist in a standard mortgage. Risks of the HELOC Velocity banking depends on a HELOC structure, and HELOCs carry risks that most homeowners underestimate. A HELOC is riskier than a mortgage for these reasons: Variable interest rates creating potential open-ended rate increases Higher interest rates than mortgages Potential increase in required payments And when it comes to accessing your equity, you may not be able to take your money out, even with an existing HELOC Variable Interest Rates With a mortgage, you typically have level, fixed interest rates for the term of the loan.  And fixed interest rates mean you have a level payment throughout your mortgage, so it’s easy to plan for that known expense. With a HELOC, you don’t get that consistency. That’s because most HELOCs have a variable interest rate that is pegged to the prime rate.  And the prime rate is based on the federal funds rate, which can change every six weeks.  With a HELOC, you’d always be hoping that rates would stay low, but you’d have no guarantee they’d do so.  Just how variable is the prime rate? The current prime rate as of May 1, 2020, is historically low at 3.25%. But it was as high as 21.5% back in the ‘80s. History shows that you can’t project that the prime will stay unprecedentedly low forever. And if the prime rises while you have a HELOC, your HELOC rates will increase right along with the prime rate. Higher Interest Rates Than Mortgages And what kind of rates can you expect with a HELOC?  Generally, expect to pay about 1 – 2% above the prime rate.  Today’s HELOC rates are hovering about 4.5 – 5.5%. Now, you can fix the rate, so you don’t have the unpredictability of rate fluctuations, but you’ll generally pay about another 1%.  Today’s interest on fixed-rate HELOCs is about 6 – 6.5%. All this shows that interest rates are higher on a HELOC than on a fixed-rate mortgage.  And the higher rate is where the bank makes its profit. On two independent Velocity Banking resources, both project rate increases of 0.5% per year.  If rates followed that trajectory, in 10 years, interest rates could rise from 5.25% to 10.25% on your HELOC.  Now, will the prime increase, pushing HELOC rates up?  When you’re at historic lows, there’s really only one direction they can go.  But couldn’t HELOC rates decrease as well?  Sure!  The point is that you don’t have control when you don’t have a fixed, certain cost, so you’re gambling that everything you can’t control goes in your favor.  Increased Payment Required During the Repayment Period