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

If the interest rate goes from 1% to 5%, that’s a 400% increase in interest rate (the rate is now 5x what it was before). The reason your payment doesn’t quintuple is that some of your payment goes to principal and not to interest.