Banking is one of the oldest businesses, and has been around for a long time, but it is constantly evolving and being changed by new financial concepts. One of the recent concepts catching the attention of many people is the velocity banking strategy.
In some countries, it is quite a prevalent concept, but in countries like the USA, it is still gaining traction. You must be a homeowner to take advantage of this banking system. This strategy is an effective way to pay off your mortgage in a fraction of the normal 30 years when utilized effectively.
For those unaware, it is not a service the bank provides but rather a strategy that enables you to pay off your loan early and gain financial freedom.
This strategy is also known as a home equity line of credit (HELOC) used for debt reduction and mortgage payment. The following is what you need to know about this banking strategy:
What is velocity banking?
The velocity banking approach takes advantage of your disposable income to pay your mortgage while helping you save the amortized interest on the loan. The main point here is to take advantage of various lines of credit to build a cash flow and use the extra amount towards paying the mortgage and covering your expenses. Financial traditionalists consider the strategy flawed because it always adds another interest payment, regardless of the rate, but if it is used quickly, it can effectively reduce total interest paid on a 30-year mortgage.
Arguments for Velocity Banking
1. Reduction in debt
As mentioned, the velocity banking strategy can help you significantly reduce your debt since you can pay off your loan in less than half the total tenure. Once applied to your financial management strategy, this method can enable you to gain financial freedom early in life.
2. Increase in monthly cash flow
Your monthly cash flow or liquidity will increase when you take advantage of a HELOC. (Cash flow simply means the amount of money that comes into your account every month.) After fulfilling your debt obligations, you still might have some cash you can spend however you like. However, you should fulfill your debt obligations before using the amount for anything else.
3. Less interest
Once you use the HELOC balance to pay the mortgage, you will replace your mortgage debt with HELOC debt compared to mortgage loans and other types of loans.
Arguments Against Velocity Banking
1. Not a suitable approach for everyone
This approach works on various assumptions; firstly, your monthly income is more than what you spend, you have a good credit score, and you are a homeowner.
2. Complicated and time-consuming
If you are not proficient in handling finances, you will have difficulty grasping the concept. Even if you understand the idea, implementing the strategies is quite complicated.
3. Requires discipline
This approach is not meant for someone who is not financially disciplined. Increased liquidity means more spending power, and increased spending power and multiple sources of interest can be a financially dangerous combination, if not handled with discipline.
Importance of A Velocity Banking Calculator
Suppose you want to understand how the velocity banking system works in a much more practical sense. In that case, you can use a calculator online to get a fair estimate of cash flow, monthly payments, and other components of this strategy. Such a calculator will help you determine the best method to pay off the mortgage at the earliest. In addition, it will help you compare different loans over factors like interest rates, payment plans, tenure, and other factors.
So, the effectiveness of HELOC banking is debatable, and many traditionalists would advise you to avoid it. However, you must read about it, use calculators to crunch the numbers, and decide for yourself.