What Is Per Diem Interest on a Mortgage Loan?
Navigate mortgage closing costs by understanding per diem interest. See how this daily charge impacts your loan payments and initial expenses.
Per diem interest on a mortgage loan refers to the interest charged for each day. The term “per diem” means “per day.” This interest is a standard component of mortgage closing costs, representing interest that accrues for a partial month. Understanding per diem interest is important for prospective homeowners.
What Per Diem Interest Means
Per diem interest covers the period from the mortgage closing date until the end of that calendar month. Lenders charge this interest because mortgage interest is typically paid in arrears. This means a payment on the first of a month covers interest accrued during the previous month; for instance, an October 1st payment covers September. When a loan closes mid-month, the lender needs compensation for interest accruing from the closing day to the month’s end. Without per diem interest, there would be a gap in interest payments between the closing date and the first full monthly payment.
How Per Diem Interest is Calculated
Calculating per diem interest involves a formula to determine the daily interest amount. First, the annual interest is found by multiplying the loan amount by the interest rate. This annual interest is then divided by 365 days to find the daily interest rate. This daily interest rate is then multiplied by the number of days remaining in the month, including the closing date.
Example Calculation
For example, consider a $200,000 loan with a 4% annual interest rate closing on the 15th of a 30-day month. The annual interest would be $8,000 ($200,000 x 0.04). Dividing this by 365 yields a daily interest of approximately $21.92 ($8,000 / 365). Since there are 16 days remaining in the month, the per diem interest due at closing would be about $350.72 ($21.92 x 16).
Per Diem Interest and Your Closing
Per diem interest is typically paid as “prepaid interest” within your closing costs, detailed on page 2, section F, of the Loan Estimate and Closing Disclosure forms. This payment covers interest from the day the loan closes through the end of the current calendar month. Because this interest is paid upfront, the first full monthly mortgage payment is usually not due until the first day of the second month following the closing. For instance, if a loan closes in mid-March, the per diem interest covers the remaining days in March. The first full mortgage payment, covering the interest for April, would then be due on May 1st.
Financial Implications
Per diem interest represents an additional upfront cost at closing, increasing the total funds a borrower needs to finalize their mortgage. While the daily amount may appear small, it can accumulate, making it an important line item to review on closing disclosures. Borrowers can influence the amount of per diem interest they pay by strategically choosing their closing date. Closing later in the month results in fewer days for which per diem interest is charged, thereby reducing this upfront cost. Conversely, closing earlier in the month means more days of per diem interest, but it also extends the time until the first full mortgage payment is due.