Velocity Banking. If you’re like most people, you probably haven’t heard of it, even if you’re already a real estate investor. However, velocity banking can pay off your mortgage in 7 years or less when used properly! Nope, that’s not a typo! 

Investing in real estate with the velocity banking strategy isn’t only faster than your typical 30-year mortgage. Amazingly, it also gives you the ability to spend less on interest, pay off your principal sooner, and reduce your debt. Even without changing your spending habits or making extra principal payments! 

Some of our investors even use velocity banking to pay-off student loans, credit card debt and other mortgages. But the smart ones use it to purchase rental properties and increase their cash flow. By using a personal line of credit or a home equity line of credit (HELOC), the borrower can accelerate the payoff of their home mortgage, or any other debt they choose, freeing up their credit line to purchase additional real estate!  Typically, this is done by combining a normal checking account with a LOC (line of credit) into one account.

Often, the investors we work with wonder why this real estate financing option isn’t more popular. Especially considering benefits and financial gain potential. Well, you can thank the big banks for that! When you borrow money from a big bank or lender, the principal of the loan is paid down over the life of the loan. Each payment to the lender will consist of a portion of interest, which is very little, typically 95% of your first 60 payments goes to interest and very little 5% goes to principal. 

Alternatively, a credit line or home equity line of credit is an agreement to lend money up to a specified amount for a stated period. Unlike a loan, the borrower can decide how much of the agreed funding they wish to draw down. Plus, the interest is only paid on the amount that is actually borrowed rather than the amount made available. 

So what’s the difference? Well, an amortized loan does not allow access to borrow at will. Also, payments are fixed over a period of time. In contrast, a credit line or HELOC gives the investor access to borrow at will, for any purpose whether its for:

  • Rental properties
  • Emergencies
  • Paying off credit card debt 
  • Car and boat purchases

When the borrower makes deposits with a line of credit, it is recorded as a payment against the loan. When the borrower withdraws money from their credit line, it is recorded as a loan and interest is charged to their account. 

Velocity banking is not a new strategy. In fact, it’s been a popular technique in Australia, where over 50% of homeowners in Australia own their homes outright with no mortgage debt. Isn’t it interesting that very few Americans own their homes outright with no mortgage debt? So why is that? 

A Little History

Americans have been taught to focus on their monthly payments and not the cost of the loan! In 1949, the rise of the mortgage market began with long term amortization – making homeownership affordable. Of course, big banks saw this as a money cow, as millions of dollars of interest poured in. Now, 95% of your payment in the first 5 years goes to interest! 

As more borrowers purchased homes, the payments to the banks increased and they had more money to loan. Because of this, the banks went crazy loaning money to everyone, qualified or not. The sad thing is the average life of the loan is only 7 years, as people continually refinance for lower payments or purchase a new home – BIG BANKS WIN!!!

To put this into perspective, a $250,000 mortgage loan at a 4% note rate would cost $179,673 of interest over the life of the loan! On top of that, this doesn’t even take into account the added junk fees of about $7,500. At the end of the day, the loan ends up costing $187,173! 

To compete with big banks, the credit unions stepped into the market offering (LOC) Personal Lines of Credit and (HELOC) Home Equity Lines of Credit. Credit unions did not charge large upfront fees, giving the credit union and borrower a huge advantage over the banks. 

Advantages of using a Credit Line

  • Access to funds anytime the borrower needs it
  • Lower payments required
  • Lower interest cost
  • Lower effective rate
  • More buying power
  • Faster debt payoff

Credit Line VS Home Loan

  • Credit lines only charge for the use of the funds over the time a borrower uses it. 
  • Does not charge for the available amount approved.
  • There are no upfront fees. 

So how does using a credit line work?

When your money is sitting around in your bank account, called the daily average, who is using this money? You or the bank? The bank is!  What if we can apply that money to your loan balance as a payment without your account being overdrawn? Would that money be working for you, and saving you interest? YES! 

By combining your new LOC and checking account into one account, your spread and daily average pays down the credit line! Also, your deposits become your LOC payments. Now, your typical day-to-day transactions are reducing your LOC and your mortgage debt! Not to mention, saving you thousands of dollars of interest in the process, without changing any spending habits!

For example, you have a simple $25,000 credit line that comes with checks and a debit card so you have use of the funds at any time.  You write a $20,000 check to make an extra principal payment against a $100,000 home mortgage on a rental property, so your home mortgage drops to $75,000 reducing the pay-off time. And, let’s say you do that every year until your loan is paid off, which in this case is 3 years. What happens to the credit line in this situation? By depositing your income into your new, all-in-one account (mortgage and checking combined), your deposits become your payments to your credit line! 

What about my monthly bills? Well, you pay them as they are due, so if you deposit $15,000 of job or earned income and $5,000 of rental income, you would reduce your credit loan balance by $20,000 and pay out your monthly bills or investments at $10,000! So, how much did your credit line go down? By $10,000! That means that in twelve months, you could make another withdraw from your credit line to pay down your home or rental mortgage.  

Your spread and in-and-out cash flow is the difference of your deposits less your withdrawals. 

With velocity banking, your money will start working FOR YOU and reducing your debt, not the banks! 

As a result, when your line of credit reduces, your available funds increase. Eventually, you can start buying more real estate and earning consistent cash flow. Imagine your buying power when you have 5 rentals, all with net cash flows of $5,000 a month! This simple principle can accelerate your wealth, retirement and set you up for life! 

If you’re interested in learning more about velocity banking and how to invest in real estate to create wealth, you can fill out a questionnaire and book an appointment with Gary right here: 

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  • Gary Massari, owner of REI Homes – Signature Properties

About the Author: Gary Massari is the founder and CEO of REI Homes – Signature Properties.  REI Homes renovates properties into luxury homes in the San Francisco Bay Area working with private investors. Gary’s renovations yield on the average $150,000 to $400,000 in profits making his investors greater than market rates of returns.  Gary does have a free private money investor learning program, for more information on this training program you can email him at [email protected]