How to Calculate Per Diem Interest on a Mortgage Loan

Per diem interest refers to interest calculated on a daily basis. In the context of a mortgage loan, it covers interest accrued for a partial month or a short period. This charge is a common component of closing costs associated with securing a mortgage. It ensures the lender is compensated for the use of loan funds from the moment they are disbursed until the regular monthly payment cycle begins.

Understanding Per Diem Interest

Mortgage interest is typically paid in arrears, meaning that your monthly payment covers the interest that accrued in the previous month. For instance, a mortgage payment due on October 1st would cover the interest for the month of September. Since a mortgage loan can close on any day of the month, per diem interest bridges the gap between the loan’s closing date and the beginning of the first full month for which a regular mortgage payment is due. It ensures continuous compensation for the lender and aligns the interest payment schedule so that the first full mortgage payment covers a complete month’s interest, paid in arrears as is standard.

Information Required for Calculation

To calculate per diem interest, several specific pieces of information must be gathered from your loan documents, such as the Loan Estimate or Closing Disclosure. The first is the total loan amount, which represents the principal balance borrowed. The second is the annual interest rate, as stated in your mortgage agreement. The third is the exact number of days in the per diem period. This period spans from your loan closing date up to, but not including, the first day of the following month for which your first full mortgage payment will be due. For example, if you close on October 15th and your first payment is due December 1st, the per diem period covers October 15th through October 31st. Finally, you need to know the number of days the lender uses in a year for interest calculations; while 365 days is common, some lenders may use 360 days.

Step-by-Step Calculation

Calculating per diem interest involves a straightforward three-step process using the information gathered. First, determine the daily interest rate by dividing your annual interest rate by the number of days in the year your lender uses for calculations, typically 365. For example, if your annual interest rate is 6% (or 0.06 as a decimal) and the lender uses 365 days, the daily interest rate would be 0.06 divided by 365, which equals approximately 0.00016438. Second, calculate the daily interest amount by multiplying your total loan amount by this daily interest rate. For instance, a $300,000 loan multiplied by a daily interest rate of 0.00016438 results in a daily interest amount of about $49.31. This figure represents the interest accrued on your loan for a single day. Third, to find the total per diem interest due, multiply the daily interest amount by the number of days in the per diem period. If your loan closes on October 20th and your first payment is due December 1st, there are 11 days remaining in October (October 20th through October 31st). Multiplying the daily interest of $49.31 by 11 days yields a total per diem interest of $542.41.

Common Scenarios for Per Diem Interest

Per diem interest is most commonly encountered during the initial closing of a mortgage loan. It is a line item on your Closing Disclosure, reflecting the interest charged from your closing date until the end of that month. Strategically, closing a mortgage closer to the end of the month can result in a lower per diem interest amount collected at closing, as fewer days remain in the month.

Another scenario where per diem interest applies is when refinancing a mortgage. If there is a gap between the payoff of your existing loan and the funding of your new loan, or if the new loan funds mid-month, per diem interest may be charged to cover this interim period. This ensures that interest accrues continuously throughout the transition.

Finally, per diem interest comes into play when a loan is paid off in the middle of a billing cycle, such as when selling a home. In this situation, the interest is calculated daily from the last payment date up to the exact payoff date. This ensures that the lender receives interest for the precise number of days the loan was outstanding during that partial month.