Why would my banker say a longer higher interest loan would be better for us?

Question

Other than to make herself more money. We consolidated a bunch of debt into a home equity loan. We were quite happy with 15 years. She offered a larger loan to consolidate more funds that dragged the payments out to 30 years with a higher interest rate and it was only 80 less than our combined payments with the 15 year loan.

I think she thought the 80 dollars could help us now and if we move and sell out house, our debts would be paid off anyway and we would have had that 80 a month extra. But that's only in the assumption that (a) we move within 15 years and (b) that we need more money later and refinance.

The difference in interest paid between the 30 year combined loan and the two 15 year loans was 183,000.

So, clearly...she was looking out to make her bank more money?

Money people...shed some light on this for me please?

Yeah, I did compute the difference. That's the 183,000. At no bank, would you find a no interest loan. I am talking in real terms here, not idealist terms.

By the way, Mr. Credit Union guy who hates banks. We did NOT take her advice. We signed for the 15 year. I was really offended that she kept saying that the 30 would have been better. I hate bankers too. I looked into credit unions and I couldn't find one that could give us a loan we could afford!

Answer 1

This is a good question for me but I'm left to assume since insufficient data have been provided.

Here's how I look at your case. If you accept the 30 year loan, you'll have to pay 183,000 more. On the other hand, you save 183,000 when you decide to refinance your loan in 15 years.

Consequently, you'll be able to save 80/month for 15 years of payment when you decide to accept the 15 year loan that's a total of 14,400 (15years*12mos.)(80saved).

Let me put your case into a hypothetical situation. Now, assume that you are going to invest 14,400 for 15 years with the same interest rate offered to you by the company (lender), will you arrive at 183,000? Here's a simple formula (14,400)(1+r)raise to N. If the answer is above 183,000 then the 183,000 additional expense is worth it. Or if you can invest 14,400 to earn 183,000 in 15 years, then the 30 years is worth the risk. Here are some things you need to ponder upon.

15 year loan
1. Storter period of time to pay
2. You have higher monthly payment.
3. You'll save 183,000

30 year loan
1. Longer periof of time to pay
2. You can save and use 14,400 for the first 15 years
3. You pay more (183,000)

Personally, I would advice you to take the 15 year loan. 14,400 saved (30 yr) is to small compared to 183,000 you need to pay more (30 yr). Considering time value of money, discounting, I can guarantee that 15 years loan is better for you.

I hope this will be of help. If you need more help. Send me more information regarding your case to my email.

Answer 2

Your banker did you NO favor at all! She DID do a very good favor for herself and the bank, however! If the loan has a early payoff penalty, she completed the three-way rape. Sorry to be so blunt, but them's the facts.

You can pay additional principal with each payment. This will shorten the term of the loan with every extra principal payment. Just make sure that you enclose a note with the payment directing the excess be paid to principal.

Your best bet would be to find another bank. In fact, I'd suggest that you walk on banks entirely and seek out a local credit union instead. You NEVER would have been treated so shabbily at a credit union. You'll pay lower rates on loans and get better rates on most deposits and lower fees all the way around.

I've been a staunch supporter of and member of credit unions for over 30 years. I never do business with traditional banks and have never had a need to do so. Most of my mortgage products have been with credit unions and I have never felt taken advantage of. As a credit union member, you are an OWNER of the institution and are treated as such.

Ditch that beech as soon as it makes economic sense to do so.

Answer 3

It sounds like she thought she was dealing with an idiot.

Most people see the "$80 a month less" payment and fall for it without realizing how much will be paid long term.

I'm glad you did your homework. With a deal like that, she (her bank) will be the only one benefiting.

Answer 4

Those people make a percentage of what they loan you. The more money, and more interest charges she can get from you, the more money she gets to put in her personal account.

Answer 5

no interest is better then low interest..the bank is just trying to make money at your expense
get a computer program and compute the difference