eli5 – why does housing loan monthly payment rise sharply due to interest rate increases?

Question

Example scenario

Loan amount – 500K, loan period – 20 yrs

Interest rate original / hike – 1% / 5%

Monthly payment original / increase – 2.3K / 3.3K

That is a 30 percent increase in monthly loan payments for a 4 percent rate increase.

Why?

Calculated using online calculator

In: 0

Answer 1

It’s 5% *per year.* If you borrow money for 20 years, some of the money you begin paying back right away, but some of the money you’re paying 5% interest per year for 20 years. And interest compounds… so 5% for two years isn’t 10%, it’s 10.25%. And 5% for 20 years isn’t 100%, it’s 265%.