Velocity Banking- how to Invest in Yourself
Christopher Shank NMLS 2562885
One of the best things about being a financial professional is that I get paid to help people build wealth. When I say this as a loan officer, most people think of wealth-building in the traditional sense. For example, per Redfin, in January of 2020, the median home value in the 37042 zip code was just over $200k. As of last month (June of 2024), the median home value in 37042 is now a hair above $300k.
In the above example, a loan officer, such as myself, helps my clients build wealth by helping them finance investments that will grow in value over time. That’s all well and good, but there’s another equally important aspect of wealth building (one that I’ve decided to dedicate an entire article to) is that of saving money.
I come from a long line of impulse buyers, and I would be doing a disservice to my grandmother if I started harping on the importance of cutting down needless purchases (one can never have too many toasters). Instead, I want to focus on cutting down an expense that’s far more insidious- interest.
Interest – It Can Hurt
When I was in middle school, I was introduced to the concept of interest in its preferential form, i.e. “if I put my money in a savings account that generates 2% interest per year, my $100 investment becomes $102 after 365 days”. When I became an adult, reality decided to punch me in the face with a brutal introduction to the other side of interest, i.e. “I purchased $100 worth of stuff with my credit card. If I don’t pay that money back by the end of the month, I’ll have to pay back an extra $2.50 because the credit card company needs to make money off my inability to have money in the first place.”
As I’ve mentioned before, interest can get nasty. When I enlisted in the Marines, my credit union gave me a debit card with which to spend my pay, and a credit card to be used in “emergencies”. I don’t mind being brutally honest; I was not a financially sound young man. Like a lot of my peers, I lived paycheck to paycheck. Occasionally, I’d run out of money a few days before being paid, but that was what credit cards were for, right? Month after month of living this way adds up, though, and before I knew it, my credit card got declined because its balance was capped. Unfortunately for me, my credit union was all too happy to increase my credit limit and my life continued.
For brevity’s sake, I’ll fast forward just a bit. At my financial low point, I had a $16k balance on my 29% credit card, $13k owed on a 28% APR vehicle bill, and $5k owed on a 15% APR 5 year loan. This meant that in interest alone, I was paying around $400/mo on my credit card, $250/mo on my car, and $60/mo on my personal loan. Folks, I legitimately paid over $700 each month on interest before any of my payments were applied to the principal of my debts.
Through the Grace of God (and a reenlistment bonus earned through selling five more years of my life to Uncle Sam), I was able to dig myself out of these debts, but I shudder to think of how much money I wasted on interest during that period of my life. Anyway, I think it’s fair to say that I was fairly traumatized by these numbers, which is why I’ve made it an effort to avoid taking on high-interest debts, if I can help it.
Fast forward to 2023. My wife and I got married. Between the wedding photographer, a ton of pumpkins for our wedding, and the raw materials I used to forge her ring, I racked up a few thousand dollars worth of debt that I couldn’t pay off immediately. Rather than let it stay on my 29% APR credit card, I took out an unsecured personal loan at 15% APR. Later that year, I became a loan officer and learned that there’s a much better way to tackle personal debt.
Personal Debt and HELOCs
Say, for the sake of the following example, let’s say you were one of those lucky folks who, in 2020, purchased a house in Clarksville for $200k, and your house is now valued at $300k. Based on averages, you also have $6.5k in credit card debt (average APR at 24.84%, sourced here), 24k in auto debt (average APR for a used car at 11.91%, sourced here), and 12k in unsecured personal loans (average APR at 12.35%, this source and the average debt amounts in this example sourced here). All told, you’ve got $42.5k in debts, and are paying on average $496.25 per month in interest.
The issue is that two thirds of your debts (your credit card and your personal loan) are unsecured, which natively have higher interest rates. Your auto loan has a relatively high interest rate because even though it is secured, the asset that loan is secured to is depreciating on a yearly basis. I’ve said before that higher risk leads to higher interest rates. That being the case, we’re pretty lucky in that there is a way to tie your debts to one of the only assets that regularly appreciates in value- your house.
A Home Equity Line of Credit (HELOC) is an open line of credit tied to the equity in your home. It’s a secured loan, in that if you decide not to pay back this loan, your lender can foreclose or establish a lien against your property to ensure that they get paid back the money they lent you. HELOCs vary lender by lender, which is why I seriously recommend you speaking with a licensed loan officer before simply deciding to pull the HELOC trigger.
Small disclaimer over, now it’s time to delve into the concept this entire article is about.
Velocity Banking
Okay example 2020 house purchaser, let’s say that you spoke with your trusted loan officer and decided that a HELOC is a good option to consolidate your debt. For the sake of this example, let’s say that you manage to snag yourself a HELOC with an APR of 9% (according to Bankrate, that’s a respectable rate as of the writing of this article). As you’ve got yourself over $100k of equity on your house, you tie $50k of that amount to a line of credit, of which you immediately put $42.5k toward your current debts.
From a numbers perspective, simply by transferring your debt over to your new HELOC, you’ve reduced your monthly interest payments from $496.25 per month down to $318.75 per month, saving you over $170 each month on interest.
But wait, there’s more! The average HELOC consists of a ten year draw phase and a twenty year repayment phase. During the draw phase, you’re free to draw up to your limit (in this example, $50k), and you’re only responsible for paying the monthly accrued interest calculated from the amount of money you have not yet paid back. After those ten years are over, your credit line is closed the remaining balance on your HELOC is scheduled for payment over twenty years.
What this means is that instead of juggling multiple open lines of credit, you can draw against and repay your debts in the form of your single HELOC. If you have a bad month, so long as you make your interest-only payment, you won’t be in any trouble. If you find yourself with an excess amount of cash at the end of the month, drop it into your HELOC to pay back your line of credit.
Eventually, you’ll get to the point where your HELOC has a $0 balance and you’ve still got some extra cash to invest at the end of the month. At this point, most folks pump that money directly into the principal of their home loan, but it’s your money, so spend it how you wish. Heck- quite a few of the investors I’ve written about in the past have used this method to jumpstart their real estate empires.
Final Notes
Going to toss another story at you. The largest ships in our navy, aircraft carriers, weigh around 100,000 tons, which means that they don’t exactly turn on a dime. Instead, they make tiny course adjustments over many miles in order to get set on the heading in which they want to go. There is no “easy button” when it comes to building financial wealth. Personally, as much as I’m geeking out over the concept of Velocity banking, I’ve got another year or so of generating my own home’s equity until I’ll have enough saved up to take out my own HELOC. That said, building awareness of your own financial situation is that first course adjustment to start your aircraft carrier’s journey toward financial security. If you’re curious about how a HELOC might benefit you, or simply to see if there’s anything out there better suited to get you to where you want to be financially, reach out to your favorite trusted financial professional and start up a conversation!
