If searching for the most effective way to clear your debt fast, then there is a good chance you’ve come across the velocity banking strategy. This is merely a strategy where you leverage your line of credit as your primary account and use lump sums to pay off a loan in less time, usually a mortgage.
The concept of velocity banking is that leveraging a line of credit helps you use your cash flow and extra money to meet your expenses while also going toward paying off your mortgage. There are numerous reasons why velocity banking has become such a popular debt-payoff strategy in the past years.
Below are the main benefits of velocity banking:
Pay Off Debts Faster
As you might already know, a huge chunk of a mortgage payment is applied to interest for over half the repayment period. Reducing the principal balance at a faster rate with lump sum payments helps minimize the interest costs of over time. That way, you take years off of your mortgage.
Less Interest Rates
No one likes paying interest? Paying money to borrow money is never an effective way to maximize your income. Considering a HELOC relies on simple interest compared to a mortgage’s amortized interest, you’ll enjoy more control of lowering your interest expense each month. However, you must ensure that you qualify for a HELOC rate that’s lower than your current mortgage rate.
Achieve Greater Financial Independence
A mortgage payment serves as an individual’s primary expense every month. Most people yearn to pay off their mortgage way before they retire. This allows them to have a greater sense of financial independence and security upon retirement. Owning your home outright has the potential to free up a substantial amount of discretionary income that can be channeled into building your retirement fund.
Provided you correctly implement and apply the velocity banking strategy, be rest assured good things will always follow. No wonder it pays off to first understand what this mortgage and debt repayment strategy entails before you can finally take up the next step.