Let’s talk about velocity banking. You’ve probably heard about that concept before. A lot of people don’t know what exactly it is and how does it work? The concept of velocity backing applies to simply accelerate your mortgage payments so you can actually get out of the debt faster.
Do you know what your mortgage payment is composed of? You have your mortgage payment, and when you’re looking at the mortgage statements, you’re going to see that part of it is made out of principal plus interest. The other chunk is basically taxes plus insurance.
You can actually ask the bank to remove your escrow and then use that money that you’re “saving” from the escrow and reinvesting it into your principal. That way, you are reducing your mortgage payments more and more because you will be charged less in interest.
Pay off your Mortgage: How does a HELOC work?
Let’s say you have a house that you bought a couple of years ago, and that you originally paid $100,000 for it. Because you wanted to get some amount of equity, you’ve actually invested $20,000, which is the equivalent of the 20%, and you’ve used $20,000 to put that as the down payment, which means you have an equity of $20,000 in the house.
You went ahead and you financed the remaining 80%, which is the equivalent of $80,000, and you just simply started paying your mortgage payments and let a few years go by. Let’s assume that, in fact, a few years did go by and now your property, instead of being worth $100,000, it is now worth $150,000. The way the HELOC works is that it takes all of your equity into account. If you subtract $150,000 minus $100,000, that means that you automatically got an equity of $50,000.
Now we’re going to add the $20,000 that you pay as part of your down payment. Let’s say that you have been very diligent with your mortgage payments and you managed to reduce that debt from $80,000 to $70,000. That means that you have paid down $10,000. We’re going to take all of these numbers and we’re going to add it up. Now, we have $80,000. That means in equity today, you have $80,000.
Now, if you’re shopping around for HELOCs, you will notice that some banks say, for example, 80 LTV, some will say 70 LTV. LTV simply means loan to value. It just means that this is the percentage that they’re going to be able to help you finance and give you that cash. When you see an 80 LTV, that means that the bank is willing to give you 80% of your equity. If you see a 70 LTV, that means they’re willing to give you 70% of this. For simplicity purposes, let’s say that you are working with a bank that is giving you an 80 LTV. That means that your new HELOC, it’s going to be for $64,000.
The concept of Velocity Banking to Pay Off Your Mortgage Faster
The concept of velocity banking leveraging a HELOC is saying that now that you have a HELOC for $64,000, you’re going to take this much money and you’re going to use that to pay down the principal. You’re going to contribute all of that $64,000 towards the principal.
Because you already paid down $10,000, that means that whatever amount is left in your mortgage is $70,000 because you originally financed $80,000, you paid down $10,000. You still owe $70,000. You’re going to do 64. You’re going to take the $64,000 and you’re going to pay this down. Now, as opposed to you owing $70,000, you’re going to owe now $6,000 in that mortgage.
Now, you’re thinking, “Wow, that’s pretty cool. I already reduced my mortgage by $6,000, which means now the interest in that mortgage is going to be towards the $6,000 and not towards the $70,000.” For those who are asking rhetorical questions like “But I still have another loan to pay over here.
Who’s going to pay for it? Me, right?”, let me tell you that one, the banks are actually in the business of making money and they’re not here to do charity, and then two, this isn’t the lotto. Of course, you’re going to have to pay that money back. The key question is, how do you actually pay that money back?
Think about what a HELOC is about. When you look at the mortgage breakdown, let’s say, for $2,000 that you’re paying. Out of that $2,000 that you’re making every month, only $100 is going to go towards your principal and $1,900 is going to go towards your interest. When a mortgage is amortized, that means the biggest chunk of that payment is going to go towards the interest payments and very little is going to go towards your mortgage, which means that it will take you pretty much forever and you will be paying a lot of money in interest before you can say, “Hey, I own my house free and clear.”
The HELOC works exactly like a credit card. That means they use simple interest, which means that whenever you’re making a payment towards your HELOC, the interests are divided equally throughout the life of that entire HELOC. You can have it for 15 years, 20 years, it all depends on the bank, but you don’t have to worry that if you’re making a $2,000 payment, that $1,900 is going to go all towards that HELOC.
It works exactly like a credit card. With one HELOC, you can get assets to $64,000, or depending on how much equity that you have acquired, but if you feel that you can actually get more money using the credit card route, then you’re more than welcome to use that route.
Three Strategies to Pay Off your Mortgage Faster
Some people can choose to even do all three: Using credit cards, using your escrow, leveraging the HELOC at the same time. The goal is to pay as much money today towards the principal because if you have the ability to pay down $64,000, then you can see here how much it has reduced that mortgage debt versus, let’s say, “Oh, I’m going to give an extra $100 every month”.
Yes, it will help you in the long-term, but if what you’re looking to do is to reduce that number of interest drastically so that way you can pay off your home faster, then this is the way to go. Because if you do $100 every month, again, it’s going to help you in the long-term, but it’s not going to have the same effect. Your goal is to want to reduce as much as you can today.
One of the best strategies is the one written by Clayton and Natali Morris. They actually took care of both mortgages or both loans at the same time following some rules.
1. Rule number one: Be disciplined. If you think you’re actually going to have a hard time managing your finances here, this is not the right strategy for you.
2. Make sure that the HELOC that you are about to purchase allows you to have direct deposit that also works like a checking account. You want your HELOC to have that capability.
You’re going to have all your direct deposit or all your paycheck go straight into your HELOC account. You’re going to have all of your money, you’re going to take $64,000, you’re going to put it towards the mortgage, and everything that you receive, all of that money from your paycheck, from your pay stub, from your job, you’re going to have all of that go straight into the HELOC.
Why? Because it serves some purposes:
- One, that means that after you use the HELOC to pay off your mortgage, now you have a HELOC monthly payment that you’re going to have to take care of. For those who don’t know, HELOCs are usually interest-only for the first year or for the first period, whatever is negotiated.
That means that whatever payments that you’re making are going to be interest-only. Let’s say, for example, for a $64,000 loan, let’s say your HELOC is $400 just in interest. But whatever money that you receive from your paycheck is the equivalent of $3,000, hypothetically. You’re going to have your employer deposit that money, your salary directly into the HELOC account, which is working like a checking account.
- That $3,000 is working or acting as a payment towards the $500 and the remaining $2,500 is going to go towards the debt. That means you’re reducing this by $2,500. If you don’t have direct deposit all you got to do is just take a copy of your check and you’re going to deposit it into this checking account, and it will work like magic, and it’ll work the same.
“What happens with my utilities?”
What happens with your utilities? What happens to your groceries and to your gas? The answer: use your credit cards. You’re going to rack up the points in a credit card that you have, whether it’s a 0% credit card, whether it’s one of those cards that give you more points in exchange of an annual fee. Whatever credit card you choose to use, you’re going to use that to do your everyday expenses. Whether it’s gas, whether it’s groceries.
You have to be extremely disciplined. Don’t just go and rack up the debt for the sake of accumulating the points. Use your credit card responsibly to get your groceries, to get your utilities in check, to pay your cell phone, pay your electric bill. The whole goal is to do a short-term sacrifice with a lot of discipline, but at the same time, you will have the ability to actually pay off your mortgage and be left with a HELOC.
At the same time, because you’re utilizing credit cards that allow you to accumulate points, you can use those points as cashback and also help you reduce that debt that you have or have it as cashback and have it sent to your checking account. That way, you can continue to bring the debt down or you just can simply save it and hoard those points and just use that for traveling, use that to get your plane ticket to that vacation that you so very much deserve because you’ve been so good at your finances and you’ve been extremely disciplined managing your money. This is a good plan to pay off your mortgage, but you are the one who finally decides how.
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