What is Per Diem Interest?

Per Diem Interest refers to the daily interest charged on a mortgage loan. It is calculated based on the outstanding principal balance of the loan and the annual interest rate, then prorated for each day of the month. Per diem interest is typically paid at the time of closing on a mortgage loan to cover the interest that accrues between the closing date and the end of the month.

Per diem interest is the amount of interest that accrues daily on a mortgage loan, starting from the day of closing until the first mortgage payment is due. This type of interest calculation is crucial for understanding the initial costs of acquiring a mortgage and for setting up the timing of regular mortgage payments. Here’s how per diem interest works in the context of mortgage loans and what it indicates for borrowers:

How Per Diem Interest Accrues on Mortgage Loans

Calculation:

• Per Diem Interest: This is calculated by taking the annual interest rate on the mortgage, dividing it by 365 (days in the year), and then multiplying by the principal balance of the loan. This gives the amount of interest that accrues on the loan each day.

  [ \text{Per Diem Interest} = \left( \frac{\text{Annual Interest Rate}}{365} \right) \times \text{Principal Loan Amount} ]

Accrual:

• From Closing to First Payment: Per diem interest typically starts accruing from the day the loan funds (at closing) and continues until the day before the first mortgage payment is due. This period can vary depending on the closing date and the chosen start date of the regular mortgage payments.

Example

If you close on a mortgage loan of $300,000 with an annual interest rate of 4% on March 15th and the first mortgage payment is due on May 1st, the per diem interest would be:

[ \text{Per Diem Interest} = \left( \frac{0.04}{365} \right) \times 300,000 = $32.88 , \text{per day} ]

If your first payment is May 1st, you would owe interest from March 15th to April 30th (47 days):

[ \text{Total Interest Due} = 47 \times 32.88 = $1,545.36 ]

This amount is usually required to be paid at the first mortgage payment in addition to the principal and interest due for that payment period.

What Per Diem Interest Indicates for Borrowers

**1. Initial Loan Costs:

• Prepaid Interest: The per diem interest represents a portion of the loan's upfront costs, showing how much interest the borrower must pay from the closing date until the loan’s regular payment cycle begins.

**2. Financial Planning:

• Budgeting for Closing: Understanding per diem interest helps borrowers prepare for the total closing costs, ensuring there are no surprises when it comes to initial out-of-pocket expenses.
• Payment Scheduling: Borrowers can influence the amount of per diem interest they need to pay by strategically choosing their closing date. For example, closing later in the month can reduce the amount of interest paid before the first mortgage payment.

**3. Loan Transparency:

• Clear Understanding of Charges: By calculating per diem interest, borrowers can clearly see part of what constitutes their mortgage costs, promoting transparency and understanding of how mortgage interest accrues and is paid.

Conclusion

Per diem interest is an important aspect of mortgage loans, representing the daily interest cost between the closing date and the start of regular mortgage payments. It helps borrowers understand and plan for the initial costs associated with their loan and contributes to the overall transparency of the mortgage process. Being aware of how per diem interest works allows borrowers to better manage their finances and make informed decisions regarding their loan payments and budgeting.