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Home / Insurance / Is Velocity Banking Your Road to Prosperity? • The insurance pro blog

Is Velocity Banking Your Road to Prosperity? • The insurance pro blog



Velocity banking is a strategy that uses a home equity credit (HELOC) to pay off debts instead of traditionally paying down debts simply with the money you earn each month. Proponents of speed banking claim that using it will help you reduce / pay off your debts much faster and greatly minimize the interest you pay on said debts.

There is also a mindset that aims to use speed banking to cover not only debts but also everyday expenses through a HELOC. This group believes that equity is mostly dead money and serves you little purpose, so it's best to put it to work anywhere and whenever possible. the potential upward velocity bank potentially offers. In addition, the actual implementation of such a strategy is much easier said than done. So we will guide you through the specific details of speed banks, note the pluses, point out the possible disadvantages and work out why this topic comes up on a blog dedicated to the topic of life insurance.

Traditional Example of Velocity Banking

Suppose you own a house worth $ 250,000 and on that house you currently have a mortgage balance of $ 1

50,000. Also, suppose you, like many Americans, have several other debts you have to pay each month. These include: car loans, credit cards, personal loans, student loans, etc.

Normally, you would make monthly payments on the various debts you have by taking money in your checking account and writing checks or writing electronic payments to the lender. A graphic description looks something like this:

 Debt service with traditional cash flow When you deal with debt in this way, you often end up paying a lot of interest going forward with so many debts is written off (fine financial term for spread) in a way that ensures that the bank receives the majority of its interest in advance. This protects the bank's income from both borrowers and refinancing.

Here is an example of how this is broken down graphically:

  Depreciation of main interest loans
source: https: //themortgagereports.com/441/principal-intresse-lån-betalning-avskrivning [19659014] According to this graph, the very first payment on this mortgage sends over 80% of the payment to interest and less than 20% to the payers down the main balance. This is the case for the first two to three years. After 18.5 years of payments, the monthly payment finally passes and the majority of each payment goes towards paying down the main balance, while the rest pays interest.

To quantify this, let's go back to the example I presented where you have a $ 250,000 house with a current mortgage balance of $ 150,000. Let's say the original mortgage was $ 200,000. Your first mortgage would be somewhere around $ 952 per month with an interest rate of 4% and a fixed mortgage for 30 years. Using the chart above, this means that your first mortgage is approximately $ 790 in interest and $ 162 in repayment of the principal balance.

This payment system ensures that lenders make the most of their profits first and it keeps borrowers indebted longer, which can make the cost of borrowing money more than many borrowers can assume.

There are other ways to approach and manage debt, we covered this a few times when we discussed life insurance loans. The simply interest-based method used by life insurance can mean that a higher nominal interest rate actually costs less compared to a bank loan that uses the amortization method described above.

Speed ​​Bank uses exactly the same principles we outlined in previous blog posts to reduce your borrowing costs. This is how it works, in theory:

You apply for an equity interest rate (HELOC) or any other credit set you have available if HELOC is not an option for you. As soon as you get approval and open HELOC, you pull down almost the entire credit line (some proponents suggest that you should leave some unused credit in emergencies) to pay or reduce your debts. When you receive your paycheck, you will use 100% of it to pay down your HELOC. In fact, you deposit your paycheck in your HELOC instead of in your checking account. For some people, this actually takes the form of depositing your paycheck into a checking account and then transferring it all manually to your HELOC by making a principal payment to your HELOC.

Once you have paid down HELOC with your paycheck, will again make a payment against your debts with the new indefinite credit limit that you released with your paycheck funds.

 Velocity Banking Cash Flow Velocity Banking potentially saves money because HELOC charges interest based on the average daily balance of HELOC throughout the month. The required payment you make to HELOC is just the interest, and that interest calculation is simply the balance in HELOC. The interest payment is not a combination of interest and capital reduction where the bank uploads the payment on the interest side.

If you carry unsecured debt (such as credit cards and personal loans), you are likely to pay significantly higher nominal interest rates. on these debts than you would do on a HELOC. This alone can save a pretty significant amount.

Using the concept of speed banks in this context, mainly to pay down doubtful / high interest debt, is really a viable way to reduce and eliminate debt much faster than the traditional method of making payments on them.

Using Velocity Banking to pay off your mortgage

Once you have eliminated other debts, Velocity Bank Advocates also suggests that you use this strategy to speed up the payment of your mortgage. You apply the same principles as before by using HELOC to make a large repayment of your mortgage and then using your paycheck to pay down your credit balance.

The key principle here is the idea that large policy repayments will reduce the total interest rate on your mortgage significantly. In addition, the credit interest rate can act as a safety valve if you encounter a cash flow and need some of the money back.

But here you have to spend some time doing some simple calculations to determine if you will really save money. The simple interest calculation that HELOC uses alone will not result in a lower total borrowing cost relative to your mortgage.

In the example I used above, the original mortgage of $ 200,000 has an estimated interest payment during the year one month one of $ 790. If you had a HELOC for as much as $ 200,000 (tricky, but not impossible and we'll get to that in the next section), your very first payment that required payment to HELOC would be $ 667, subject to an interest rate of 4%. BUT … HELOC rarely has lower interest rates than 30-year fixed mortgages, so we have to take that into account. If the HELOC interest rate is 5%, the first interest payment is USD 834. That's $ 44 more than the 30-year fixed mortgage. Now, the HELOC method of calculating interest can reduce interest payments faster than the 30-year fixed mortgage would do (especially if you use your entire paycheck to pay down the balance), so there's still a chance that speed banking will come forward. You need to run the calculation for your specific situation to see if that is the case.

Usually the rate bank recommendation is not to refinance your entire mortgage with a HELOC (but there are some, and that & # 39 ;s what I & # 39; ll cover in the next section). Instead, the recommendation is to use your current HELOC with a much smaller allowable credit limit than your mortgage balance, you make "chunk" payments against your mortgage to reduce the balance. In other words, you are swapping mortgage debt for HELOC debt and potentially paying less interest due to the simple interest calculation on HELOC. Eventually you pay off the mortgage and reduce the HELOC balance to zero. In some circumstances, this will happen faster than just making an extra mortgage with the cash you have in the bank.

Using the Velocity Banking concept to buy a house and retain capital as purchasing power

Taking things a step further, Some people use this principle to buy a house with a home equity credit. In this case, HELOC is in "first position" and no traditional mortgage exists. It is not an easy task and will require some significant leg work at the end of the buyer to find a bank that is willing to issue such a HELOC for such a purpose.

When you buy your home with HELOC, you apply the same basic principles. . Every time you receive a paycheck, you use 100% of it to pay down your HELOC. When costs fall due, you simply use HELOC to pay them, which increases your outstanding debt burden, but you will minimize it again when you receive your next paycheck.

This twist on speed banking requires that you strongly adhere to beliefs and have the following impossible circumstances:

  1. Home equity is dead money that serves you virtually no purpose as long as you continue to live in the home.
  2. You absolutely must make more money than you spend each month (otherwise you will eventually run out of credit to use the expenses.)
  3. You must understand that all HELOCs will eventually require refinancing, otherwise you will have to repay the HELOC balance (often all at once as
  4. Preferably you do not already have many other debts and have a fairly high credit score.

Velocity Banking and life insurance

If you happen to own cash value life insurance, you can apply the principles for speed bank with it.You would easily use an insurance loan in the same way as using a HELOC with speed bank.This allows you to use the same simple interest rate calculation HELOCs use as life insurance loan is very similar.

The only exception to this would be the Since the life insurance loan uses cash value in the insurance as collateral, you can not extract added value due to a v that you have unused housing capital. You can possibly buy a home with a life insurance loan and apply for a HELOC to use in an emergency.

There are also some agents who advocate using HELOC to buy a life or indexed universal life insurance as a way to build wealth through the cash accumulation function in these insurances or to take advantage of the death benefit of a life insurance for a greater inheritance value. I'm always wary of this idea because I'm nervous about the risk to those at home. However, if you have many other assets to pull yourself out of a bad situation, it may be worth looking.

Does Velocity Banking Work?

The principles of speed banks have a fairly solid logic behind them. But you absolutely have to spend some time working through the math to decide if it makes sense to you. This is not a silver bullet and it is not absolutely the best option to pay down debt and / or pay off your home. The last strategy I outlined is not so much a concern for absolute interest savings, as it keeps an open line of money available through equity, making it harder to quantify what makes it a good idea or bad idea. It is much more a philosophical approach to money than an absolutely mathematical solution to a problem.

This is also a strategy for the more hardcore DIYs. Those who are not willing to actively pursue such a strategy, or who feel a little intimidated by intermediate economic concepts, should avoid this. There are also a fairly large number of risks one takes to use this strategy, and I want to warn the risk deviation to keep a distance from this.


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