Okay, chances are you’ve seen a video on YouTube or attended an event that made claims that you can pay off your mortgage with a HELOC, right?
The presenter may have shown you charts, numbers, and calculations on why this works.
But you’re still skeptical about it… And you have questions and concerns.
In this article, I’m going to give you an honest review of the HELOC method and how it really works.
This strategy has many names… Velocity Banking, Mortgage Acceleration, Debt Acceleration, Replace Your Mortgage, Accelerated Banking, etc. The official name to this strategy is Accelerated Banking.
In my research, the strategy is actually pretty common in Australia and New Zealand. It is actually reported at one point that 1/4 of all Australians use this method to pay down their mortgage faster. But does it actually save money and time?
Let’s first look at the traditional 30-year mortgage its pros and cons.
First of all, the concept of a 30-year mortgage is actually fairly new when looking at the entire banking history. Traditionally, Americans bought homes using 5, 10, 15-year amortization loans. This was more prevalent prior to the 1970s and 1980s. Although we had much higher interest rates in the 80s, people bought homes using shorter amortization which meant that people would pay a lower amount of total interest.
The benefit of a 30-year mortgage is that the payments are low. Thus, more Americans today can afford to buy a home.
Today, the 30-year amortization is the new norm. Even with a historically low-interest rate of 3-5%, the total amount of interest owed is significantly high.
Just take a look at this example. We start with a $250,000 mortgage balance at 5% interest rate over the 30 year period. The total interest amount is nearly $234,000. That’s almost the same amount as the original mortgage balance.
Because we’re adding more time to the mix, the interest rates have more power to affect the balance.
Just take a look at this video of other drawbacks of a mortgage: https://www.youtube.com/watch?v=g6IgTzJhHh8
But here’s the real danger…
Most homeowners today are either selling and moving to another home or they’re refinancing.
When either event take place, the homeowners ultimately “reset” their amortization clocks and/or the front-loaded amortization zone.
If you take a look at the image above, it shows an amortization chart. The left side of the chart represents the very beginning of the mortgage life. The right side of the chart represents the ending of the mortgage payoff.
The orange and the green bar represents the proportion of interest and the principal payment. Do you notice how the orange bar is bigger than the green? The orange bar represents the interest you’re paying on a given monthly payment. This ultimately means that the majority of your monthly payment is going straight to your interest payment.
Even if you refinance to a shorter amortization period, it still resets your amortization chart back to the front-loaded interest zone. This is something to consider when you choose to refinance to that “lower rate”
Okay, so this is where the HELOC strategy comes in to play. What’s different about a HELOC?
You may already have some questions and concerns about this method:
The Accelerated Banking strategy relies on TWO main things…
1. Using a Line of Credit to be able to take the money, repay it, and then reuse it. It’s kinda like a credit card!
2. The ability to “manipulate” the Average Daily Balance & Average Daily Interest…
Now, you might be saying…
What the heck is “Average Daily Balance & Average Daily Interest”???
Average Daily Interest is an interest that is applied to the balance of the debt for THAT day. Average Daily Interest is calculated by taking the interest rate divided by 365 days TIMES the balance of that day… So if you have a $10,000 line of credit balance at 6% interest, that means you are paying $1.64 of interest for that specific day. If the balance changes the next day, so does the interest amount. Get it?
So what if we can take ALL of our income and cash that we have… Deposit it against your line of credit to bring down the average daily balance but still have the ability to use that money for our life’s expenses??? Wouldn’t that help with lowering your interest amount? Right?
By lowering our average daily balance, we are reducing the interest faster and by reducing the interest amount, our payoff time is drastically shortened. This is why the line of credit triumphs over your traditional mortgage or a loan even if the line of credit has a higher interest rate!
Now because we’re lowering the total debt amount, the interest rate has less of a “power” to create interest. Think of it this way… 7% interest on $1,000 will clearly be less of an interest amount than 3% of $10,000. Just because the rate is higher, doesn’t mean that you’re automatically paying more. It’s only when you have a large balance that makes a big difference.
We have a quick video explaining this: https://www.youtube.com/watch?v=_VOwg185Pvg
During the 2008 real estate market crash, we’ve seen many homeowners lose their homes and lose their HELOC. But the main issue behind the crash was that homeowners simply had TOO MUCH debt on their homes.
Homeowners were using their HELOCs to spend more money and buy “stuff”. But because this strategy’s objective is to reduce debt and reduce spending, the likelyhood of the HELOC being shut down is close to zero.
Here’s the video explanation on why the bank may shut your HELOC down: https://www.youtube.com/watch?v=xaqcNUgc1T8
The Accelerated Banking strategy does not add more debt. It’s designed to reduce debt. When we use a HELOC to chunk away from the principal balance of a mortgage, you’re actually left with the same debt balance – not more. This is true also when replacing your mortgage with a HELOC.
Now, you might be saying… “Is this strategy right for me?” or “What if I have a super unique situation?”
This strategy DOES have its requirements…
1.) You must have a positive cash flow. Meaning, you are making more money than what you spend. If you’re living paycheck-to-paycheck, you can STILL use this strategy but you must move to a positive cash flow situation sooner than later. There are ways to recover lost cash flow pretty quickly without cutting back on expenses.
2.) If you are looking to pay off your mortgage, then you must have a minimum 10% equity. Though you can use this strategy without hardly any equity, it’s optimal to have at least some equity!
3.) If you are looking to pay off anything else (student loans, credit cards, auto-loans), we have special tools just for you!
“But… What if my income is inconsistent?”
This strategy is PERFECT for those that have fluctuating incomes as it helps you keep a consistent expense flow without having to cut back on your spending whenever you have a bad month.
Okay… So you need a line of credit?
There are different types of lines of credit:
1.) HELOC (Home Equity Line of Credit)
2.) PLOC (Personal Line of Credit)
3.) BLOC (Business Line of Credit)
4.) Credit Cards (Yup! That’s right!)
You can use any of those tools to implement this strategy! Generally, You can get lines of credit from banks and credit unions.
Banks and Lenders will typically look at a couple of things…
They’ll look at your credit, your debt-to-income ratio, your current mortgage statement, and your overall financial strength. If you don’t have good credit, there ARE banks that look for other factors so don’t give up!
You can typically improve your likelihood for approval by (1) adding a co-signer (2) having a strong understanding of banking (3) and filling out your application with as much information as possible. Banks and credit unions are businesses. Qualifications are often subjective and you can negotiate your way to increasing your approval potential!
Don’t believe me? Download our FREE eBook and Calculator To show you how much time and money you can save with our strategy!