For most people, the velocity bank strategy sounds very appealing on the surface. Many believe leveraging this strategy will allow them to pay off their mortgage early. But there are a few underlying assumptions the velocity banking strategy makes that can fall apart in reality and leave you with more financial burdens than thought in the first place.
Acquainting yourself with these assumptions goes a long way in making sure you get the most from what velocity bank offers. In this blog post, we examine the common assumptions surrounding the velocity banking strategy.
Assumption 1: Saving on Interest Payments is the Most Important Factor in Paying off Your Mortgage
With the velocity banking strategy, you have to save interest to truly benefit from paying off your mortgage early. Although interest payments can add up and be a hassle, they aren’t necessarily the most important factor. When you’re caught up in saving interest, you tend to forget that you are using all of your free cash toward that purpose.
Of course, paying off liabilities will result in lower interest payments. But it also has the potential to leave you using all of your free cash and experience lost opportunity in the long run.
Assumption 2: Equity in Your House Count as Savings, and a HELOC Will Tap into that Best
There’s no denying that the velocity bank strategy can help increase your home equity. But that’s not savings, and you might not always be able to access it. The issue here is that for money to truly count as savings, it must have maximum liquidity and safety.
You need to access the cash reliably and quickly for it to serve you well when you need it. While you stand to increase your home equity, velocity banking doesn’t increase the money you can access and use.
For this strategy to work, it needs these assumptions to hold true. For some people, velocity bank may help and be in line with their financial goals. But for those who want to save for retirement, or want to leverage the life insurance cash value, velocity banking many not be the right strategy.