Mortgage Per Diem Interest Calculator

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The Latin phrase "per diem" means "for a day."
Naturally, when you add the word interest, you get per diem interest, which is the amount of interest for one day.

When you close on a mortgage loan, you will owe interest from the day of closing until the end of that month, which is referred to as per diem interest. This interest is paid at the time of settlement and is usually included in the closing costs.

Understanding Per Diem Interest in Mortgages

When you close on a home loan, you'll notice an itemized charge on your closing disclosure called "per diem interest." What exactly does this mean, and how is it calculated? Understanding mortgage per diem interest can help you estimate your closing costs accurately.

Per diem interest refers to the daily interest cost of your mortgage between your closing date and the last day of the closing month. Interest still accumulates during this period since you aren't making payments immediately. The lender charges this interest upfront at closing.

For example, say you close your mortgage on March 15, but your first payment isn't due until May 1. You would owe interest per day between March 15 and May 31. This ensures the lender receives interest for the entire period between closing and the last day of the closing month.

Calculating Per Diem Interest: A Step-by-Step Guide

Per diem interest is calculated using your mortgage amount, interest rate, and number of days. Here is the basic formula:

Mortgage amount x interest rate / 365 days x number of days = daily interest

So, on a $200,000 loan at 4% interest with 30 days per diem, it would be:

$200,000 x 0.04 (4% rate) / 365 days x 30 days = $656.16 interest accrued daily

This means you would owe $656.16 per diem interest for your 30-day period between closing and the last day of the closing month. The settlement day is included in the calculation. The longer the per diem period, the higher this cost will be.

Key Takeaways

  • It is charged upfront at settlement but is not considered part of your down payment or closing costs. It is prepaid interest.
  • Per diem interest is tax-deductible in the year you purchase your home, just like mortgage interest.
  • The per diem period is your "settlement month." It is based on the exact days between the day of closing and the last day of the month.
  • Typically, your 1st mortgage payment is due in the second month following the closing date. For instance, if the closing occurs on March 15th, the first payment is scheduled for May 1st. You skip April. This timing is attributed to covering the mortgage payment for the preceding month. This is known as arrears.
  • You can shorten the per diem period by asking your lender if you can time your closing date differently or pay your first payment earlier.
  • When shopping for lenders, look for options to pay daily interest monthly or finance it into your loan to avoid significant upfront costs.
  • Your per diem will be based on an adjustable mortgage's initial fixed interest rate.

When you receive your loan estimate, pay attention to the estimated per-diem interest cost listed on page 2 of your settlement statement. This will give you an idea of the closing cost before finalizing your mortgage. You can also use an online per diem interest calculator to experiment with different loan amounts, rates, and per diem periods.

Bottom Line

Mortgage per diem interest is a standard closing cost that prepays the daily interest between closing day and the last day of the month. Knowing how it's calculated and the factors that impact it will help you budget for this cost when determining your total cash needed for closing.


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Home Buying 101: Essential Resources for First-Time Buyers 
Home Buying Tips for First Time Buyers

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