“Per diem” is Latin for "per day." So, per diem interest means the amount of interest you pay per day. Mortgage lenders charge per diem interest at closing to cover the interest cost of your loan from the day you close (settlement date) up until your first mortgage payment. Since they charge this amount at closing, it's included with your closing costs.
Per diem interest calculator: calculate daily loan interest
To help illustrate how per diem interest works, let's assume you close on the first day of the month and your first mortgage payment is due on the first of the following month. At closing, you will pay per diem interest on the loan from the first day of the month up until the last day of the month. (The closing day is included in this.) This is the only time you'll pay per diem interest. All future mortgage interest charges will be included in your regular mortgage payments.
How to calculate per diem interest
You can calculate per diem interest by multiplying your loan amount by your interest rate and dividing it by the number of days in a year. Here’s an example of how that would look if you had a mortgage for $400,000 at a 6.5% interest rate:
$400,000 x .065 / 365 = $71.23 per day
Then to calculate how much per diem interest you owe, you would multiply the number of days from your closing date (including your closing date) until your first mortgage payment by $71.23.
If you settle your loan on the 15th day of the month and the month has 30 days, you will pay 15 days of interest on the loan, so $1,068.45. If you close on the last day of the month, you will pay interest for one day (the day of closing), so $71.23.
But the important thing to realize is that in both of these examples, you will still pay the same amount of interest over the lifetime of your mortgage. In the first example you will just pay a larger chunk of interest at closing and in the second example you’ll pay a larger chunk of interest through your mortgage payments.
Can I save money on per diem interest by closing later in the month?
No, you can’t save money on per diem interest by choosing a later closing date. A later closing date can lower the amount of per diem interest you’ll pay at closing, but it doesn’t lower the amount of interest you’ll pay over the lifetime of the loan. That is fixed based on your terms and what type of loan you chose.
So, you can’t “save money” by closing later in the month. You will save on the amount of cash you pay upfront, but you will still pay the same amount of interest on your mortgage throughout the life of the loan no matter what day you choose to close on.
Some home buyers can negotiate for the seller to pay the cost of per diem interest as a seller credit that’s included in closing costs. Or you can ask for lender-paid closing costs, which come with their own downsides. If you’re worried about making your mortgage payment, you could even negotiate for them to pay multiple months of per diem interest so you wouldn’t have to make your payment for a longer period of time.
Again, this won’t actually change anything about your loan or how much you owe—it's different than making an extra mortgage payment. But it could possibly give you more time to have the cash on hand as well as saving you a bit on interest since your seller is covering it through the credit.