Velocity banking is a strategy where you use a line of credit as your primary account and use lump sums to pay off a loan, usually a mortgage. The idea behind this is that using a line of credit will help you use your cash flow and extra money to cover your expenses but also go toward paying off your mortgage.
Most often the velocity bank strategy utilizes a HELOC, and the HELOC functions as your primary expense account instead of a checking account. This eliminates the need for a savings account since all your free cash flow will go toward the mortgage via the HELOC. People who use the velocity banking strategy believe it will allow them to pay off their mortgages faster and with less interest. Here are more assumptions about velocity banking.
Equity In Your House Counts As Savings
Yes, the velocity banking strategy can help increase your home equity. But that’s not savings, and you might not always be able to access it. The problem here is that for money to truly count as savings, it must have maximum liquidity and safety. You must be able to access the cash reliably and quickly for it to serve you well when you need it. So, while you may increase your home equity, you aren’t actually increasing the money you can access and use.
Paying Your Mortgage Earlier Is The Best Decision
The velocity bank strategy relies on the assumption that you need to pay off your mortgage as quickly as possible while using all of your available funds to do so. This may sound confusing, but you may not want to pay off your mortgage as quickly as possible. Your home is often your most effective liability, and it isn’t necessarily bad to have a mortgage on it.
Instead, it’s more financially savvy to continue to pay off your mortgage while using some of your free cash flow to build cash value in whole life insurance, invest, or grow your savings in other ways. That way, you will comfortably handle other things.