The continuously rising home prices and interest rates have many homeowners opting for a HELOC rather than a cash-out refinance to tap into their home equity for debt consolidation. Leveraging home equity to consolidate credit card, medical and other types of debt is now the norm.
But the velocity banking strategy, a debt pay-down hack, has gained immense popularity over the past number of years. You might already be wondering; can it help you pay off your mortgage to faster? Is it the right strategy for everyone?
Well, counting on the velocity banking strategy allows you to use your HELOC as your checking account. Once you open a HELOC account, draw almost the entire amount, leaving enough for emergencies if you lack an emergency fund. You then have to take the draw and channel it toward your debt and monthly bills, including your mortgage.
When you get paid, put your entire paycheck back toward the HELOC. You have to continue doing this, paying bills from the HELOC and repaying it with your paychecks until everything is paid off. It is then that you can start using it to not just pay your mortgage but pay down your mortgage.
So what makes the velocity banking strategy work remarkably? The interest rate on a HELOC is much lower than on credit cards. No wonder the velocity banking allows you to pay high-interest down debt faster. Less accruing interest automatically means that more money is going to the principal.
To succeed with the velocity banking strategy, you should first have a positive monthly cash flow. Second, you want a HELOC with an interest rate less than or at least equal to your mortgage interest rate. Last but not least, must be dedicated to paying down debt. Taking on any additional debt will certainly derail your efforts.
Provided you follow the velocity banking strategy correctly., it will surely make debt consolidation and quick debt reduction possible for those willing and able to make it work. Ensure you fully understand what it entails before you can finally include it in your mortgage payment plan.