Velocity Banking Explained– Part 1

Velocity banking has been helping people who want to get done with their mortgage payments as quickly as possible. It is a strategy that is applied to mortgage repayments. But before we generalize it and call it great, let’s take a look at what velocity banking really is.

Velocity Banking-101

Paying off mortgages is a slow and tiresome process. In velocity banking, you open a Home Equity Line of Credit (HELOC). One this is opened, you then declare it as your primary account. This will enable you to make direct monthly payments and expenses to this account.
Once your account has been initiated, you have to follow the below-mentioned steps.

• Make an initial deposit to HELOC.
• Make sure that this deposit is a large amount and remember to keep the deposit limit in mind.
• For the next few months, keep on receiving your income and expenses in the same account.
• Pay off the outstanding balance.
• Once the outstanding balance has been paid off, keep paying large deposits and eventually get done with your mortgage.

The main thing that you need to understand in this process is that generally, we keep our extra money to our bank accounts and don’t use it. Through a HELOC, you can utilize this extra money to pay off your debt.
There are certain things that are important to this strategy. They include the following.

• Keep the interest rate of the HELOC in check.
• Make sure that you add early repayment clause to the mortgage.
• Also, keep your cash-flow in check.

Since every day is not the same, you can also use the money for your day-to-day expenditures.

Understanding Velocity Banking Through an Example

In order to understand the concept of velocity banking, let us look at the following example.
For a better understanding of this example, all the relevant data is listed separately.

• Current mortgage is $100,000.
• APR is 5%.
• The appraised value is $125,000.
• The equity owned is $25,000.
• Income is $4000 and expenses are $3000 (mortgage payment is included)
• Profit turns out to be $1,000.

Once the HELOC is set up, it will be used as a checking account. And the mortgage payment process will commence once the outstanding balance is paid off.
Since the value of real estate has been appraised to $125,000, the bank will offer a HELOC of $112,500. $112,500 (appraised value) – $100,000 (currently owe) = $12,500 approved HELOC. We’ll also give our HELOC a 7% APR on our outstanding balances.
After the setup is initiated, we will deposit an initial payment of $6,000. It needs to be indicated that the Now, once the initial velocity banking concept has been set up, we can make a lump-sum payment in the form of a check or transfer to our primary mortgage in the amount of $6,000. We will also indicate that this amount is dedicated to loan repayment.
After processing this, our mortgage is now $94,000 and our HELOC balance is $6,000. We will begin repaying our mortgage and use HELOC for other covering other expenditures. In 6 months the remaining HELOC balance will be paid off.

Then we will make another lump-sum mortgage payment for $6,000. By this time, we’ve accrued some interest, but also paid off a portion of our mortgage in record time. Notice how the mortgage payment will go down, and the HELOC payment will reset to $6,000 every time we make the lump-sum mortgage payment.
Continue this process for another two and a half years; paying our monthly mortgage payment, along with the HELOC lump-sum payments, we will end up with a much lower balance than if we were to make the minimum monthly payments on our mortgage. At year three, our liability sheet looks like this.
We can gather that it will take only 77 months to pay-off the mortgage. This is definitely the best way to approach the mortgage situation.