Introduction
Many homeowners debate the best way to pay off their mortgage faster: should you make extra payments toward your existing mortgage, or is the HELOC (Home Equity Line of Credit) strategy more effective? In this blog, we’ll settle this debate once and for all by exploring the key differences between the two approaches, and why the HELOC strategy, or Velocity Banking, can be a smarter choice.

HELOC Strategy Explained
The HELOC strategy revolves around leveraging a Home Equity Line of Credit to make lump-sum payments toward your mortgage principal. By doing so, you reduce the overall principal balance, and thus the interest you pay over time. You then use your income to pay down the HELOC balance, repeating the process to accelerate the mortgage payoff.

Example: Client Success with HELOC
One of the clients, Ed, was initially skeptical of the HELOC strategy. Before using it, he was paying only about $200 toward his mortgage principal each month. After switching to the HELOC method, Ed was able to reduce his mortgage principal by $4,446 in just one month, a stark improvement from his previous approach.

The Risks of Extra Payments
Many people believe that making extra payments directly toward their mortgage is the safest and most efficient way to pay off debt. However, there are some hidden risks:

Lack of Liquidity: Once extra payments are made, that money is tied up in your home equity. If an emergency arises or you need that money for an investment, it’s difficult to access without resorting to a costly cash-out refinance.
Missed Opportunities: By locking extra funds into your mortgage, you miss out on investment opportunities, as it becomes harder to tap into that equity.

HELOC Benefits Over Traditional Payments

Flexibility: With a HELOC, you can access funds whenever you need them. Whether it’s for a medical emergency, investment, or even everyday expenses, the revolving nature of a HELOC offers much-needed liquidity.
Interest Savings: When you deposit your income into the HELOC, it immediately reduces the balance. Since HELOC interest is calculated daily, lowering the balance even for a few weeks can significantly reduce the total interest you’ll pay.
Cash Flow Management: Many people use their HELOC alongside credit cards, allowing them to consolidate expenses and pay off their credit card balance on the last day of the billing cycle, ensuring they avoid credit card interest while maximizing cash flow.

The Danger of Savings Accounts
Some people argue they don’t need a HELOC because they have savings. However, with current inflation rates, savings accounts often result in a net loss. For example:

If your savings account earns 1% interest and inflation is 5%, you’re effectively losing money. With a $10,000 savings balance, you’re losing about $400 annually due to inflation.
How HELOC Outperforms Extra Payments

To illustrate why the HELOC strategy is more efficient, consider this:

Extra Mortgage Payments: If you make an extra payment toward your mortgage, you lower the balance but lose access to those funds unless you refinance.
HELOC Payments: By depositing your income into a HELOC, you immediately reduce the balance and save on interest. Plus, the money is still available if needed, providing much greater financial flexibility.

Conclusion
The HELOC strategy offers greater flexibility, faster mortgage payoff, and better cash flow management compared to making extra payments toward your mortgage. By using a HELOC, homeowners can save more money on interest and access their funds when necessary. For those ready to explore a more efficient method of paying off their mortgage, the HELOC strategy is the superior choice.
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