TEMPLE, Texas — When it comes to paying off loans or credit cards, have you heard of the velocity concept? or velocity banking? It can get a little technical, so we'll try and keep it simple.
So, here's how it works. Let's say you have a 30-year mortgage on your house, $1,500 per month payment, you then get a home equity line of credit or a HELOC, that's the acronym, for $500 per month and you use the money from the HELOC to make larger payments on the home mortgage. In theory, by doing this you can pay off a 30-year mortgage in 20 years or even shorter.
Certified Financial Planner Rolandus "Rojo" Johnson told KCEN, "What it does, it takes your biggest asset, we've talked about buying a home versus renting a home, but it takes your biggest asset and then you can turn that asset into a debt eliminator if you will."
Something very important to know: You will need very good credit and have to have equity in your home, and the home will be the collateral for both loans.
Rojo says, "They say, and this is where it gets a little tricky, if you put a large chunk of your income into the home equity line of credit to rapidly pay it off and consistently doing that over time will allow you then to actually turn around and take another large chunk out and actually start putting money towards your home."
Now, just like anything in life, we are about to give you the downside.
Rolandus says, "It is a great method because I am here to tell you it is very very tricky to execute."
If interest rates on your HELOC are a variable rate, and it jumps up, or if you lose your income or a big portion of it, you could face real financial danger.
Rolandus told 6 News, “That's the other thing about the home equity line of credit in the state of Texas. There are awesome tools to have, but they are very difficult to attain. I think that credit score has to be minimum 720 or 750 or around there depending on the bank or whoever you go through. Do all of your homework before, speak with an advisor before or a CPA or a banker, get input from all of those people before you dive into it because what you don't want to do is get yourself into a situation where now you are overloaded with debt, with debt!"
A little over 13 million Americans have a HELOC on their primary residence, so again, it's not a hugely popular option.