# How does a variable interest rate loan work?

I took out a \$100,000 loan on my house on a variable rate loan at 4.5% for 30 years. For example, see this calculator.

Assuming the interest rate stays the same, the final cost will be \$145,000. In the five years, I'd have payed around \$7,000 in principle and \$16,000 in interest.

Now, let's say after 5 years, the interest rate goes up to 10%, what happens to the loan?

Would it be the same as if I took out a new loan at 2020 for 93,000 at 10% for 20 years?

In that case, my full payment would be \$228,818+\$23,000.

Had I payed 16,000 in principle and \$7,000 in interest, I'd be paying \$192,000+\$23,000

Did I get messed over by paying interest first?

• By the way, you should read the loan contract. There is often a teaser rate (initial fixed rate period, so that the loan is really a hybrid adjustable rate mortgage), that is, a time period where the interest rate can't increase. For instance, a "7/1" loan has the fixed rate for seven years, then an adjustment each year. Then, there often is a limit to how much the rate can go up each year, called a rate cap. Between the two of those, it might be impossible for your loan to go to 10% in 5 years. Dec 7, 2015 at 2:47

Assuming the interest rate stays the same, the final cost will be \$145,000.

You have shown 20% or 20K as initial down payment. So the final cost will be \$165,000. The interest will be around 65,000.

In the five years, I'd have payed around \$7,000 in principle and \$16,000 in interest.

Yes that's right. The Calculator starts from June 2015, so if you do it for full 5 years say from Jan 2016, it would be around 17,000 in interest.

Now, let's say after 5 years, the interest rate goes up to 10%, what happens to the loan? Would it be the same as if I took out a new loan at 2020 for 93,000 at 10% for 20 years?

Sorry, to get a right comparison, initial period was 30 years, you paid for 5 years, after increase in rate, apply this for next 25 years.

Yes you would end up paying more interest compared to 4.5%.

Had I payed 16,000 in principle and \$7,000 in interest, I'd be paying \$192,000+\$23,000 Did I get messed over by paying interest first?

Not really. Interest is accrued and needs to be paid immediately, and as you are paying more than the interest accrued, your principal goes down. Hence the next interest calculated is less. This is how an reducing balance amortization works.