Velocity banking is a financial strategy aimed at accelerating the repayment of debt and building wealth through the strategic use of credit accounts, primarily a home equity line of credit (HELOC). The goal of velocity banking is to pay off debts more quickly and reduce interest costs, ultimately achieving financial freedom sooner.
The concept of velocity banking revolves around the principle of leveraging the available equity in a property to efficiently manage and pay off high-interest debts. Here’s how it works:
1. Acquiring a HELOC: The first step in velocity banking is to obtain a home equity line of credit (HELOC). A HELOC is a revolving line of credit secured by the equity in a property. The amount of credit available depends on the home’s appraised value and the outstanding mortgage balance.
2. Income Channeling: With a HELOC in place, the account holder directs their income, such as their salary or business earnings, directly into the HELOC account. This effectively reduces the average daily balance of the HELOC, leading to lower interest charges.
3. Daily Expenses: Rather than using a traditional checking account or debit card for daily expenses, the account holder uses the HELOC for transactions like groceries, bills, and other routine expenses.
4. Debt Repayment: As the income is directly deposited into the HELOC and daily expenses are paid from the same account, the account balance fluctuates throughout the month. The account holder can use the available funds and any additional income not used for expenses to make extra payments toward high-interest debts.
5. Repeating the Process: This process is repeated each month, continually channeling income into the HELOC and using it to pay expenses and make extra debt payments. Over time, this method accelerates debt payoff and reduces interest costs.
Benefits of velocity banking:
- Faster Debt Payoff: velocity banking can significantly shorten the time it takes to pay off debts, including mortgages, credit cards, student loans, and other loans.
- Interest Savings: By maintaining a lower average daily balance on the HELOC, borrowers reduce the amount on which interest is calculated, resulting in potential interest savings.
- Flexibility and Control: velocity banking provides greater control over debt management and allows borrowers to customize their financial strategy.
- Build Wealth: With debts paid off faster, individuals can focus on building wealth, saving for retirement, or investing in assets.
- Responsible Financial Management: velocity banking requires strict financial discipline to avoid overspending and to manage the revolving credit responsibly.
- HELOC Interest Rates: HELOCs typically have variable interest rates, which may fluctuate based on market conditions.
- Risk of Default: Using a HELOC involves putting your home equity on the line. It’s essential to manage the account responsibly to avoid the risk of foreclosure if you can’t meet repayment obligations.
- Not Suitable for Everyone: velocity banking is most effective for individuals with stable incomes, substantial home equity, and the ability to manage finances responsibly.
How to Get A Heloc
Getting a Home Equity Line of Credit (HELOC) typically involves several steps. Here’s a general guide on how to obtain a HELOC:
- Check Your Home Equity: Determine the amount of equity you have in your home. Equity is the difference between the current market value of your home and the outstanding mortgage balance. Lenders usually require a certain level of equity to qualify for a HELOC.
- Research Lenders: Shop around and research different lenders offering HELOCs. Compare interest rates, fees, repayment terms, and any special features or benefits.
- Gather Documentation: Prepare the necessary documentation, which may include proof of income, tax returns, proof of homeownership, and information about the property’s value.
- Apply for the HELOC: Submit an application to the chosen lender. The application process typically involves providing your financial information and details about your property.
- Home Appraisal: The lender may require a home appraisal to determine the current market value of your property. This is to assess the amount of equity available.
- Underwriting and Approval: The lender will review your application and conduct a thorough underwriting process to assess your creditworthiness and ability to repay the HELOC. If approved, you’ll receive a credit limit based on the available equity in your home.
- Receive the HELOC Agreement: Upon approval, you’ll receive a HELOC agreement that outlines the terms, interest rate, repayment options, and other relevant details. Review the agreement carefully before accepting the offer.
- Complete Closing Process: Similar to a mortgage, the HELOC requires a closing process. You’ll need to sign the necessary documents and may have to pay some closing costs, which can include an application fee, appraisal fee, and other fees.
- Activate the HELOC: Once the closing process is complete, the HELOC becomes active, and you can access the credit line as needed.
- Use the HELOC Wisely: Remember that a HELOC is a revolving line of credit. Use the funds wisely and make responsible financial decisions. Avoid borrowing more than you can afford to repay.