Per diem interest is how much interest you’ll be charged each day of your mortgage. You’ll pay per diem interest upfront as part of your closing costs. How much per diem interest you’ll pay depends on how many days there are between when you close on your home and when you make your first mortgage payment. Here’s the simple way to calculate how much per diem interest you’ll pay at closing:
- Loan x interest % = annual interest
- Annual interest ÷ 365 = per diem interest
- Per diem interest x days from close to your first payment = per diem interest due at closing
» SEE: Per Diem Interest Calculator
What is per diem interest?
In the mortgage industry, per diem interest is the daily interest charged on home loan interest. The borrower owes the lender the total per diem interest at closing.
Banks start charging interest the moment they fund the loan. But your first payment isn’t due until the beginning of the month following the loan disbursement on your closing date.
So the lender collects prepaid interest for the period from closing and your initial mortgage payment. As a result, you avoid compound interest and start your mortgage payments with a blank slate.
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The day you close affects how much per diem interest you’ll owe. As you get closer to the end of the month, there are fewer days to accrue interest. Therefore, the nearer your closing date is to the month’s end, the less you’ll pay in per diem interest.
For example, if you close on the 22nd of the month, you'll accrue 14 fewer days than if you closed on the 8th. On a $300,000 fixed-rate, 30-year mortgage with a 5.5% interest rate, that’s about $633 in savings.
How to calculate per diem interest
Multiply your loan amount by the interest rate to calculate the annual interest amount. Divide the annual interest amount by the number of days in the year (365) to find the amount of interest charged per day (per diem interest). Count the days from your closing date until your first mortgage payment, including closing day. Multiply the daily interest by the number of days from step 3 to calculate the total per diem interest you will owe.
Your lender will disclose the official per diem interest amount you’ll owe on your closing estimate. You can also use our per diem interest calculator for an estimate.
Per diem interest example
Let's say you took out a $300,000 loan at an interest rate of 5.5%, and your closing date was August 22. Here's how you can estimate the per diem interest breakdown.
Loan amount × interest rate = annual interest charge
$300,000 × 0.055 (5.5%) = $16,500
Annual interest charge ÷ no. of days in the year = per diem interest
$16,500 ÷ 365 = $45.21
Per diem interest × no. of days from closing to last day of the month = total interest due
$45.21 x 10 = $452.10 due on August 22