Does Velocity Banking Work?

By | February 8, 2020
velocity banking

There are many strategies to get out of debt. Two of the more popular strategies to get out of debt are either the debt avalanche method or the debt snowball method. Velocity banking is my new favorite. With the debt avalanche method, you pay the off the debt according to the interest rate. Specifically, you pay off the highest interest rate first as that is the most expensive debt you have. With the debt snowball method, you payoff the debt with the lowest balance. Each of these strategies work as long as you can stick to them. However, for the past few months, I’ve been learning about an alternative way to payoff debt fast. That strategy is called velocity banking. Let’s dive in to learn all about velocity banking.

I. Velocity Banking

Velocity banking goes by many names, including mortgage acceleration, debt acceleration, sweep strategy, etc. In this post, I will refer to it as velocity banking.

Even in the world of velocity banking, there are numerous approaches to it. For example, for those with a mortgage, one approach is to get a first position home equity line of credit (HELOC) and use that as your main checking account. Have I lost you yet? Well just bare with me. This is a new strategy to me too. But that’s not the approach I’ll be taking on this blog to pay off debt fast. Let’s explore further.

1. What Is Velocity Banking?

Velocity banking is an approach by which a person utilizes a line of credit as a form of debt tool or debt weapon to pay off debt fast. Here are the general steps.

A. Have Positive Cash Flow

Ensure that you have positive cash flow every month. A positive cash flow exists when your monthly income exceeds your monthly expenses. If your monthly expenses is more, then you’re in a negative cash flow situation. Velocity banking won’t work if you have negative cash flow every month. So, the first criteria to do this strategy is to ensure that you have a positive cash flow every month.

B. Open Up A Line Of Credit

This could be either a credit card, personal line of credit (PLOC) or a home equity line of credit. I’m personally not a fan of using a credit card, but it certainly can be done.

Generally, a HELOC is preferable because of the low interest rate that is associated with the HELOC. However, the HELOC is secured by your home and so if something goes wrong, you could lose your house. Ouch!

A personal line of credit is a great option. It’s usually unsecured and therefore have a higher interest rate. But, if you really understand the velocity banking strategy, even if you are paying a higher interest rate (that is not amortized), it will cost you less in interest to use a PLOC than it would to keep paying the amortized debt according to its amortized schedule.

C. Pay Down Debt Using The Chunking Method

Ok this is a new concept. So, let’s take an example. Let’s say you have a personal line of credit for $15,000. And you have a mortgage of $200,000. One approach would be to take half, 2/3rds or all of the money in the line of credit and pay it towards the mortgage. So, for example, you could take $10,000 from the line of credit and put it towards the mortgage owing $190,000. Understand that the total debt remains the same ($200,000), but you shifted a portion of the mortgage debt to the line of credit.

So why would you do that? The answer lies in the difference between the amortized schedule of the mortgage (which admittedly is based off simple interest calculation) and the simple interest cost of the line of credit. Notably, the line of credit is not based off an amortized schedule, but in general, most loans are (such as student loans, car loans and mortgages).

The $10,000 you put towards the debt is called chunking because you are taking a chunk (here $10,000) from the line of credit to put it towards the amortized debt.

D. Put All Your Income In The Line Of Credit

Say what? You heard me. One way to approach velocity banking is to transfer or deposit all your income back into the line of credit. The reason for this is that it will reduce the average daily balance of the line of credit and pay it down faster. Also, it would mean that instead of having extra money lying around in the checking account doing nothing, it is working for you in the line of credit.

Additionally, if you didn’t use 100% of the line of credit to chunk the balance of the debt (in this case the mortgage), then the amount that wasn’t used could serve as your emergency fund. Finally, after out put all your income into the line of credit, you then use the line of credit to pay all your bills for that month (like you ordinarily would with a checking account).

E. Repeat Steps C And D Above Until Debt Is Paid Off

Once you paid back the line of credit down to zero, then repeat steps C-D until the debt is paid off. People following the velocity banking strategy has paid off their 30-year mortgage in a fraction of the time – sometimes as early as 5-7 years.

2. Velocity Banking – Video Overview

Clearly, trying to sum up velocity banking in the above 5 steps is no easy matter. It’s not a mainstream concept and it requires a shift in thinking and approach to banking.

There are numerous YouTube videos describing the subject. Denzel Rodriguez makes tons of videos on the subject, and I follow his channel a lot. But one of the best explanations of velocity banking comes from the following video from Mike Adams:

3. Does Velocity Banking Work?

I believe it does. I’m so convinced by this pay off debt strategy that I will be putting it in practice myself. In 2020, I will have two mortgages and a car loan to payoff. Check out my debt tracker page for additional details. Because I’ve never tried this strategy before, I will take it slow.

My car loan balance right now is $21,665 at a 4% interest rate. The monthly payment is $356. I plan on utilizing the velocity banking strategy to payoff my car loan in 2020. I also plan on tracking my progress along the way.

After I close on the condo, I will be applying for a 15k line of credit. This will be a checking line of credit (CLOC) (as opposed to a personal line of credit (PLOC)). This CLOC will serve as overdraft protection for my checking account, but I should be able to utilize the velocity banking strategy with that debt weapon. I will also apply for a PLOC with another banking institution just to have it in reserve in case I need extra funds or something unusual happens.



So, in my opinion, based on my research, velocity banking works. However, as I utilize the strategy myself, I will be able to give my first hand account of the good and the bad utilizing this strategy.

Conclusion

Velocity banking has been around for a while, perhaps under different names. But it’s new to me. I vaguely heard about this strategy when I bought my first house but it seemed way too complicated then. Honestly, it’s still a bit complicated, but the information is much more digestible to me now for some reason.

One of the main arguments against velocity banking is that a person can achieve either the same or similar effects by simply paying extra to the mortgage (or debt) every month. To some extent that may be true. But there’s a lot that goes into the strategy (that I didn’t cover in this post), that makes it worthwhile to use a line of credit rather than just sending extra payments to the debt.

For example, once you send in your extra payments, you can’t use that money again. But, once you payoff the line of credit, you have access to that money again. That’s one advantage of the velocity banking strategy. That being said, during the 2008 economic turmoil, banks froze HELOCs and it’s certainly possible for them to do so again.

Don’t misunderstand me. The fastest way to payoff any debt is to pay extra to the principal. There is nothing magical about the velocity banking strategy. You ARE still paying extra to the debt in an effort to pay if off quickly. But, you’re doing it in such a way that allows you to maintain your current spending habits and have 100% of your money working for you all the time.

Velocity banking takes discipline and it’s not without risk. In fact, improper implementation of this strategy can leave you in a worst position than when you got started. Please consult a professional (ie lawyer, accountant, financial adviser/planner) before engaging in this strategy. Remember that I can’t give you legal, tax, financial planning advice and the information presented in this blog post (or anywhere else on this blog for that matter) should not be relied upon or otherwise usurp the role of a qualified professional to give that advice. Rather it’s for entertainment purposes, but I hope you found value in the information presented.

Now that the disclaimer is out the way, let me just say that I will track my progress utilizing the velocity banking strategy. I hope it works for me, and if you try it, I hope it works for you too.

What did you think about the velocity banking strategy? Do you think it’s a scam? What did you think of this post, let me know by commenting below.

15 thoughts on “Does Velocity Banking Work?

  1. Jon

    Interesting! I’ve read and watched videos on velocity banking But never been willing to take the plunge. Look forward to following along.

    Reply
    1. Dividend Portfolio Post author

      Ya itโ€™s kind of scary. I plan to start off small and seeing how it works as I go.

      Reply
  2. Pingback: Market Timing - Dividend Portfolio

    1. Dividend Portfolio Post author

      Hey Jon,

      I haven’t updated this yet, because I haven’t officially started the velocity banking experiment. I’m in the midst of closing on condo, which I expect to be next month. Depending on what bank I finally use to close on the condo will depend on whether or not my car loan is paid off at the time of closing. So, to the extent that I am able to use the velocity banking strategy, it would be to pay off my mortgage.

      Additionally, after I close on the condo, I hope to buy another house as my primary residence, so there’s a possibility that I won’t go full force into velocity banking until after that happens. After I buy my primary residence, I am not looking to buy anymore real estate for at least another three years. There is a also a chance that I will do velocity banking on a small scale (after I close on the condo) and before I buy the primary residence, but we will see.

      Thanks for checking. Even in these crazy times, I still think velocity banking works – as long as I can get the line of credit that I will be applying for. The last thing I’ll mention is that having a line of credit counts against my debt-to-income ratio (even if it’s a zero balance) according to mortgage lenders that I’ve talked to. That’s why I might wait until I have my primary residence before I start it, but I’m still deciding.

      Reply
  3. David

    ‘Velocity banking’ only works if your line of credit has an interest rate slightly higher (like, within a percent or so), or lower than that , than the loan you are ‘chunking’. Further, the claim you can pay off your mortgage faster without changing your spending habits is incorrect. Velocity banking requires you make extra principle payments for it to work (while increasing your risk substantially).

    Otherwise, it is a scam. I have watched many of the videos (including the one you linked to) concerning velocity banking. He makes several mistakes (i.e., claiming interest is calculated via ‘amortization’- amortization is a payment calculation not an interest calculation) and is either ignorant of how interest and loans work or he is intentionally lying. Either way, I would not take advice from someone who is either ignorant or lying.

    His claim that you can get the money back out is misleading at best. You can not get your ‘chunked’ payment out, nor can you get the money out of your line credit until you have paid it off. You could just open a line of credit, never touch it, and send your extra payments in to your mortgage. If I lose my job, I can pull money from my line of credit, and I only have one debt to pay instead of two. Or, the bank could shut down your line of credit at any time, meaning you can’t get ‘your money’ back out.

    Anyway, don’t take my word for it. Run the comparison looking at the interest rate of the various loans and the line of credit. Compare the amount of time to pay off everything (including the line of credit) using velocity banking versus sending in extra payments (i.e. if you chunk 24,000 once per year versus paying 2,000 extra per month directly to your mortgage). His comparison in the video is not an apples to apples comparison. Once you take the interest rate of the line of credit into account, most people are better off just sending in extra payments.

    I, for example, ran the numbers for my situation and found that sending in payments directly pays off my mortgage 2 months faster (and 1,500 less in interest) when compared to velocity banking.

    Reply
    1. Dividend Portfolio Post author

      Hey David. Thanks for the thoughtful response. I haven’t started velocity banking yet. And, the Covid-19 pandemic has delayed any possible start to taking that approach. If I do decide to do velocity banking (and that’s still the plan) I intend to start off small just to ensure that I know what I’m doing. In the meantime, my plan is to send extra money every month to pay off my mortgage.

      I’ll certainly share my experiences if I did take that approach. I’ll also continue to do my research. The concept remains intriguing but I wouldn’t want to foolishly dive right in without knowing all the risks associated with the strategy.

      Reply
    2. Joshua

      Sorry, David, but you’re way off base on several points. First of all, the interest rates are of little consequence. The key to the strategy is HOW the debt is paid off. When you pay via the bank’s amortization schedule, you’re paying for huge chunks of interest for the whole mortgage, not just the “chunk” you’re working on, so on the average loan it takes about 2 years and $20,000 in interest to pay down $10,000 in principal. I put that same $10,000 on my HELOC and pay it off in 6-10 months (depending on other spending) and $1000 in interest. That’s a huge difference and my interest rates aren’t even close. Now you can always counter that you can “just pay extra principal” without the HELOC, which is true, but most people don’t have $10,000 lying around to throw on their mortgage, so it’s a much slower process. Also, I can tell you for a fact that this works without changing your spending habits. My wife and I are sloppy at budgeting (unfortunately), but I’ve changed this one aspect of how we do our banking and made huge strides on our mortgage in two years. I’ll give you some numbers in a minute, but trust me when I say that it’s not about skipping lattes and all that. It works because 1) at the end of the month all the money you didn’t use to pay bills is automatically applied to the mortgage, 2) any money that I DID put toward bills was temporarily leaning on my HELOC balance and suppressing the amount of interest I would have to pay, and 3) because I’m paying it down without interest payments from the rest of my mortgage balance getting in the way – almost all my money is attacking the principal directly at all times. That’s way different from, “I think I’ll pay some extra principal this month”.

      Next, when you say that you can’t get your money back you’re wrong here as well. It’s a line of credit. I put a $10,000 chunk of my mortgage on my HELOC and then all of my bills and paychecks go toward it. Following month the balance is $8-$9,000 or whatever and I do the same thing. If I need more money next month I take more money out of the line and the balance just goes up a bit higher. It’s flexible and I can get more money out whenever I need it. In fact, I’ve got a $98,000 HELOC – try getting $98,000 out of your checking account if you need extra money some month. I’ve got way more flexibility than someone who’s just letting their money rot in a checking account AND my money is always working for me bringing my debt and interest costs down. The way I see it, letting your money sit in a checking account rotting away until you need it and letting interest suck away at you is what is risky. And PS – the whole HELOC freezing thing is overblown. It can happen in an economic downturn if I suddenly become underwater, but I didn’t get a HELOC to put in a new kitchen or something, I’m specifically using it to build equity faster. If you have trouble with that idea, think about it like this: when I move $10,000 from my mortgage to the HELOC I still owe the same amount ($300,000 vs $290,000 + $10,000, for example). The person who uses a HELOC to put in the proverbial kitchen owes the whole mortgage balance PLUS the price of the kitchen, which means they could easily be underwater if real estate prices drop. That’s why HELOC’s get frozen, if the bank sees you overextending yourself. The likelihood of getting frozen when using a HELOC doing the velocity strategy is negligible at best.

      The main thing to understand about this that I don’t think people get is amortization is a SCHEDULE, but the money has not been CHARGED TO YOU YET. In other words, if you won the lottery tomorrow you’d pay off the balance not the balance plus all the interest payments that are scheduled. So, this works the same way month in and month out, but time is of the essence. When I take $10,000 off of my mortgage I literally skip over all the associated interest payments that I was going to have to pay – the $20,000 I referred to before. Then I put the $10,000 on the HELOC where I’m not charged all those massive interest payments for the rest of the loan and it costs me around $1000 in interest to pay off. How can putting an extra $500-$1000 or whatever per month toward your principal compete with knocking out $20,000 in interest all at once? And an additional bonus is that when I do this my following regular payments also have a much better principal to interest ratio, which makes them more efficient, too.

      So, I’ve been doing this for two years and I’ll give you the numbers on it. The amortization schedule on my closing doc says that I should be at a balance of $290,000 this month. My actual loan balance is $236,500. I’ve been able to put an extra $53,500 toward my mortgage in two years – not skipping lattes or begging at the highway exit, but simply doing this strategy. I’m skipping over huge, soul sucking interest payments just by moving a portion of my balance over to my HELOC, paying it off more efficiently, and then doing it again over and over. Most people pay by the bank’s schedule (and barely manage that), which charges you so much interest that you might as well have bought a second, somewhat smaller house, btw – yikes! You can criticize the strategy if you want, but if you’re like most people then you’re probably paying the maximum amount of interest (not paying extra principal each month) and there’s a bunch of money sitting in your checking account just waiting around to be used. I would advise you that your strategy is extremely risky vs putting your money to work for you around the clock and avoiding as much interest as possible. ๐Ÿ™‚

      Let me know if you have any thoughts or questions.

      Reply
      1. Dividend Portfolio Post author

        Hey Joshua,

        Thanks for your thoughtful and detailed post! I ready through it several times and I think it’s a great explanation of the velocity banking strategy. I can’t wait to attempt to do this, but I’m still waiting on my condo to close and for some other things in my life to fall into place. For example, I might buy another house to live in within the next year.

        My only concern with the HELOC strategy, or in my case, the PELOC (personal line of credit) strategy is that some banks will consider that I’ve used the entire amount of the PELOC and count it against my debt-to-income calculation – even if my PELOC balance is zero. I realize not all banks do this, and so I will have to find a bank that doesn’t, but it’s one of my hesitation of going out right now to get a PELOC. I’m still in the process of buying a condo, and want to buy another house soon after that, and wanted to have the maximum flexibility possibility with respect to having access to multiple lenders so that I can choose the best one to obtain a mortgage. Other than that, the strategy appears to be sound, so long as you stick to it.

        Thanks again for the post, and I’m sure that I’ll be coming back to it, if and when I’m ready to start the velocity banking strategy.

        I’m glad it’s been working for you. The more stories I hear of this working for real people, the better!

        Reply
        1. Joshua

          No problem, glad to help. I think you might be a little confused, though, so I’m just going to throw this out there for you. If there’s a zero balance on your PLOC, then it won’t factor into your debt / income ratio. You haven’t borrowed against it yet, so there’s no debt. It can affect your debt / CREDIT ratio, but that’s a positive thing. In general, a person should take out a ton of credit – PLOC, HELOC, credit cards from every company, and then use hardly any of it. This will show banks that you’re a boss who has a ton of purchasing power and the restraint to not overuse it. That’s what your debt / credit ratio is all about. If you have a ton of credit, but also a ton of debt or very little of either now you don’t look so good to them. Having tons of credit and very low debt = awesome.

          Having said that, any time you’re closing on a mortgage, you’re right DON’T apply for a PLOC or any other type of credit. They check your credit at the beginning of the process and the end and any changes can cause red flags. If you’re in the process of closing on a condo, just get the PLOC after you’re closed.

          A couple other tips / suggestions – don’t max out the PLOC. You don’t really need to do that for this strategy to work, I would say the maximum would be about $10,000 at a time, but even a few thousand is good esp until you get the hang of it. You have to remember, it’s a revolving line of credit, but you need some room on the line to take out money for bills. If you max it out and you end up getting bills before you get paid or something else comes up you could be in a tough spot. Maybe just start with $5000 and then as you notice it’s going down, add a little more. I also get the impression that everyone waits until the line is paid off before putting more principal toward the mortgage – why? When my HELOC balance goes down a couple thousand, I make another principal payment against my mortgage right away. Like I said in that first reply – time is of the essence. The faster you can get more principal toward your mortgage (in a responsible way), the better. Also, make sure you have some savings as an emergency backup. I didn’t mention that in the other reply, but I have investments and savings, which is why I feel comfortable basically emptying my checking account onto my mortgage.

          I use Quicken Loans / Rocket Mortgage for my mortgages, Penfed Credit Union for my HELOCs, and TD Bank for my PLOC, and I haven’t had any complaints. I do a lot of research and these are some of the best companies to work with. Quicken, for example, has won the JD Power & Assoc. customer service award a bunch of times and they are one of the best mortgage companies around. They don’t do HELOC’s, however, and that led me to Penfed. The nice thing with Penfed is that they also do HELOC’s on rental properties and members get discounts on Travelers Insurance and they offer a car buying service, a cash back credit card and a bunch of other cool stuff, so I would highly recommend becoming a member. You make a small donation to one of their charities or something, it’s really easy. Anyway, like I said, glad to help. Good luck.

          Reply
          1. Dividend Portfolio Post author

            Thanks again Joshua for the detailed reply. I’ll be sure to look into PenFed when I ready to start this process.

          2. Jordan

            OK need some help here….I ‘plunk’ down $10000 into my mortgage using a heloc (and pay the heloc back or whatever in a year’s time), in one year (the first year) it saves me about 17k in interest in my case. Now, if I just take that same ‘payment’ paid into the heloc ( I realize you turn it into a checking account, blah, blah..to keep daily interest down, I’m completely ignoring heloc interest right now), and just make that payment, $833, every month for 12 months as an extra principle payment, it saves me 18k in interest…sooo, it saves me MORE than the heloc method, why would I go the heloc route when it saves less, costs money to open and costs daily interest?

  4. Joshua

    Hi Jordan, these are common misconceptions. First of all, my HELOC didn’t cost me anything to open. They usually defer any fees and only charge them if you close it early in a few years. Even then it is only a couple hundred dollars in fees, so don’t lose any sleep over that.

    Second, the part that you blah blah blahed over is one of the major strengths of the strategy, so think about it like this. When you pay an extra $833 toward your mortgage, that’s great, but you’re doing it once a month and for the rest of the time your mortgage balance is $100K or whatever. When I put all my income toward the mortgage all month, my average daily balance on my mortgage is $96,000, for example. That means at 4% you’ll pay $333.33 and I’ll pay $320.00 in interest. I didn’t factor in the fact that a HELOC has a slightly higher interest rate, but I’m also not factoring in that the minute I started this strategy I was able to empty my checking account onto my mortgage which gives me a head start.

    Anyway, imagine that you save $5-$10 on interest using this strategy, because you average daily balance is lower and you can put your whole checking account toward the mortgage. Next month your balance is $10 lower than it would have been, because the money you save on interest goes toward your principal. Then the following month you save more, because your balance is lower than it would have been. It’s like a snowball effect that amplifies the savings. You can think about it like this. Paying all of your disposable income toward your principal will net you X savings – a fixed number due to your income / bills. Using this strategy of paying all of your disposable income toward the principal PLUS 1) emptying your checking account onto the mortgage and 2) keeping the average daily balance of the mortgage lower will net you X + Y + Z savings – a variable number due to a bunch of factors that is obviously going to be higher and ever increasing. The more interest you save faster, the more money you can put on your balance, which means you save more on interest, which means you can put more on principal and on and on. You can’t compete with that by just paying extra principal once a month.

    Reply
  5. Jon VanWoerkom

    Have you started the velocity banking experiment?
    I get the basic in principal, but would enjoy seeing the finances played out real time. Any updates yet?

    Reply
    1. Dividend Portfolio Post author

      Hey Jon,

      No updates yet. COVID-19 hasn’t helped. But, with any luck, I should be closing on the condo in December and will explore the possibility of doing velocity banking on the condo. We will see. I want to buy another house after the condo, and I might have to wait a year or two before I can do that. If that’s the case, then I will definitely explore the velocity banking concept for 2021.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge