You’ve probably seen videos or read about using a HELOC (Home Equity Line of Credit) to pay off your mortgage faster. This method, known as Velocity Banking or Accelerated Banking, has been gaining attention for helping homeowners achieve financial freedom sooner. But there’s a lot of confusion around how the HELOC interest differs from mortgage interest. In this blog, I’ll clear up misconceptions about HELOCs, explain why this strategy works, and show how you can leverage your cash flow to save on interest and pay off your mortgage faster.

The Interest Calculation: HELOC vs. Mortgage
One of the biggest misconceptions I see is around how interest is calculated on a HELOC versus a mortgage. Some people believe that HELOCs and mortgages use different types of interest calculations. The truth is, both HELOCs and mortgages calculate interest using simple interest.

Clarifying Amortized vs. Simple Interest:
A mortgage uses simple interest calculated on an amortization schedule. This means your monthly payment includes both interest and a portion of principal, front-loading interest in the early years.
A HELOC, on the other hand, uses simple interest but doesn’t follow an amortization schedule because it’s a revolving line of credit. This allows flexibility in principal payments, which directly influences daily interest costs.
So, contrary to popular belief (and even some of my own past explanations!), there’s no inherent difference in how interest is calculated between a HELOC and a mortgage. The difference lies in how we can manipulate the balance on a HELOC to save on interest.

Why Use a HELOC to Pay Off Your Mortgage?
If the interest calculation is the same, why use a HELOC at all? The answer lies in flexibility and cash flow management. With a HELOC, you can lower the balance at any time using income or additional funds. Since HELOC interest is calculated daily, reducing the balance even temporarily can save you money.

Here’s how it works:

– Leveraging the HELOC: Use your HELOC to make a significant payment toward your mortgage principal, reducing the mortgage balance and thereby lowering future interest.
– Managing Cash Flow: Instead of making regular mortgage payments, you focus on paying down the HELOC balance with your income. The daily interest accrues based on the remaining balance, so the more you pay down, the less interest you incur.
– Repeating the Process: Once the HELOC balance is paid down, you can repeat the process with another lump-sum payment, accelerating the payoff period.
– Real-Life Example: Flexibility in Action
During the COVID-19 pandemic, one of my clients, a schoolteacher who was furloughed, used her HELOC to cover living expenses without missing payments or facing foreclosure. This flexibility gave her the breathing room she needed until she returned to work. With a traditional mortgage, this wouldn’t have been possible without refinancing.

Why Not Just Make Extra Payments on Your Mortgage?
A common question is, “Can’t I just make extra payments on my mortgage?”, while extra payments do help reduce principal, a mortgage is a closed-end loan. Once you make an extra payment, that money is tied up in your home equity and can’t be accessed again unless you refinance or take out another loan.

With a HELOC:
– You can make payments that reduce the balance and save on interest.
– You retain the ability to withdraw funds if needed, offering both liquidity and debt reduction.

Misconceptions Around Inflation and Interest Rates
Many people assume that with low mortgage rates (around 3%) and high inflation (4-5%), it makes more sense to let inflation “pay off” your mortgage. But this ignores the reality of amortization. In the early years of a 30-year mortgage, most of your payment goes toward interest, meaning inflation’s effects on reducing debt value don’t help as much as you’d think.

How Daily Balance Influences Savings
To illustrate, let’s say you have a HELOC with a $10,000 balance at 6% interest. By making a $1,000 payment halfway through the month, you reduce the principal and daily interest accrual. This means you’re not just lowering your balance—you’re actively cutting down on interest costs for the month. Each time the balance drops, the interest amount adjusts, leading to significant savings over time.

Using a Credit Card to Maximize Cash Flow
One tip I share with my clients is using a credit card as a buffer. By putting daily expenses on a credit card and paying it off in full each month, you delay the need to draw from your HELOC. This allows you to keep your HELOC balance lower for longer, reducing your interest costs. Plus, you can potentially earn cashback or points on your credit card, which further enhances your financial strategy.

The HELOC Strategy Isn’t for Everyone!
Finally, it’s important to note that this strategy isn’t a one-size-fits-all solution. While it’s a powerful tool for those with positive cash flow and financial discipline, it’s not ideal for everyone. If you’re struggling with income stability or managing debt, this approach might add more risk than reward.

Conclusion
Using a HELOC to accelerate your mortgage payoff could be a smart strategy for those who can manage cash flow effectively. By leveraging the flexibility of a HELOC, you can reduce your principal faster, save on interest, and still access funds if needed. This approach allows you to break free from the cycle of endless interest payments, potentially saving thousands over the life of your mortgage.

If you’re interested in learning more, check out my free resources, including our mortgage payoff calculator and webinar on Velocity Banking. These tools can give you deeper insights into how to put the HELOC strategy to work for you.