I need help understanding my new Lender

[Adrian Lemus]

Hi Biggerpockets, I need some clarification on what the lending company is going to really charge or better yet on how to do the Proper Math! 

On the contract it says the following:

The applicable annual rate will be 4.99% for the first month, increasing .5% for each subsequent month, up to a maximum annual rate to the lesser of 7.99% and the maximum amount permitted. 

I have had several people telling me different things. How do I go about on doing the proper math to understand how much interest will be charged? I totally understand the increments of .5% each month but what I don't understand is how the interest gets applied.

The 2 different options that keeps popping up from people that tries to explain this to me is the following:

If I borrow $100,000

Option A:

1st Month: $100,000 x 4.99% = $4,990 interest

2nd Month: $104,990 x 5.49% = $5,763 interest

3rd Month: $110,753 x 5.99% + $6,634 interest

Option B:

1st Month: $100,000 x (4.99% / 8) = $623 Interest

2nd Month: $100,623 x (5.49% / 8) = $690 Interest

3rd Month: $101,313 x  (5.99% / 8) = $758 Interest