Introduction
You may have heard about using a Home Equity Line of Credit (HELOC) to pay off your mortgage faster, also known as Velocity Banking. While this strategy is effective, many people wonder how it makes sense to pay off a low-interest fixed-rate mortgage with a higher-interest HELOC. In this blog, we'll break down this concept and show how the math works, debunking common misconceptions along the way.

How the HELOC Strategy Works
The core idea behind the HELOC strategy is using a HELOC as a cash flow management tool. Unlike a mortgage, which is amortized over a long period, a HELOC is revolving credit. You can pay it down and borrow from it again as needed, allowing for flexibility in managing your principal payments.

The strategy involves using the HELOC to make large payments towards your mortgage principal. By doing so, you reduce the overall balance, which in turn reduces the interest accrued on the mortgage. You then use your regular income to pay off the HELOC balance, cycling through the process to accelerate your mortgage payoff.

Common Concern: Higher HELOC Interest Rates
One of the biggest concerns is how it makes sense to use a HELOC with a higher interest rate—often 7-9%—to pay off a mortgage with a lower rate, such as 3-4%. This seems counterintuitive, but the key isn’t the interest rate itself. It’s about reducing the average daily balance on the mortgage, which reduces the total interest you’ll pay over time.

Example Scenario

Mortgage: $271,000 balance at a 3% fixed interest rate
HELOC: $220,000 limit at 9% interest
Despite the higher interest rate on the HELOC, the strategy is effective because it focuses on cash flow management. By making lump-sum payments on the mortgage principal using the HELOC, and then using your income to pay down the HELOC, you reduce the principal faster than you would by making regular mortgage payments alone.

The Math Behind the Strategy

Let’s look at a real-life example from a client:
Starting Mortgage Balance: $271,000 at 3% interest
HELOC Interest Rate: 9%
Monthly Income: $10,000
Monthly Living Expenses: $6,000
This client used a $20,000 HELOC chunk to make a principal payment on their mortgage, reducing the balance from $271,000 to $251,000. Simultaneously, they deposited their monthly income into the HELOC, which lowered the balance and, consequently, the daily interest they had to pay on the HELOC.

Despite the 9% HELOC interest rate, the client is projected to pay off their mortgage in 7 years instead of the original 30-year term. By leveraging their cash flow and focusing on reducing the average daily balance, they save around $95,000 in interest.

Myth: HELOCs Are Risky Because of Variable Rates
Another common misconception is that HELOCs are inherently risky due to variable interest rates. While it’s true that many HELOCs have adjustable rates, the strategy mitigates this risk by focusing on reducing the balance quickly. Even with a fluctuating interest rate, the savings from reducing the mortgage balance can outweigh the costs of a higher HELOC rate.

Key Takeaways
HELOCs Aren’t Replacements for Mortgages: A HELOC is a tool for cash flow management, not a substitute for a mortgage.
Cash Flow Is Key: The strategy works best when you have positive cash flow, meaning your income exceeds your living expenses.
Savings Come from Reducing the Principal: The goal is to reduce the mortgage principal faster, saving you money in the long run, even with a higher HELOC interest rate.

Conclusion
Using a HELOC to pay off a mortgage faster is an effective strategy, but only when used correctly. It’s not about focusing on the interest rate difference between the HELOC and the mortgage, but about leveraging your cash flow to reduce the average daily balance and pay off the mortgage faster. If you want to explore this strategy further, tools like spreadsheets and calculators can help you visualize how the numbers work in your favor.
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