Per Diem Interest For A Mortgage

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What is per diem interest?

Per diem interest means daily interest: “diem” is Latin for “day.” In the home financing world, the term applies to the interest you’ll pay, based on your mortgage rate but calculated by the day, in the period between the day your home loan closes and the beginning of your standard monthly mortgage payments. This happens because mortgage billing cycles usually start on the first day of the month, but a mortgage can close on any business day.

How does per diem interest work?

Your per diem charges are considered prepaid charges, which are technically separate from closing costs, although you may also pay them at closing. Other prepaid charges include a prorated amount toward your homeowners insurance and property taxes.

However, lenders also have different policies on per diem interest. While many require you to pay your per diem interest upfront, in a lump sum, others will roll it into your first payment. Others may not charge per diem interest at all.

Per diem interest example

Say you’re taking out a mortgage of $400,000 to buy your home, and the interest rate is 6 percent. Your closing date is five days before the first of the month, and your lender requires per diem interest to cover that gap. Here’s how the math breaks down:

1. Multiply your loan amount by the interest rate: $400,000 x 0.06 = $24,000
2. Divide the interest by 365 to find the daily rate: $24,000 / 365 = $65.75
3. Multiply the daily rate by the number of days between your closing date and the first day of the month: $65.75 x 5 = $328.75

This gives you the amount of per diem interest you will need to pay. In this example, the total per diem interest is $328.75.

Once the next month begins, you won’t need to worry about per diem expenses anymore. Instead, you’ll start seeing a bill for the standard monthly payment that was spelled out in your closing disclosure.

Current per diem interest rates

Your per diem interest charge is calculated using your mortgage interest rate. If you don’t yet have a preapproval, the best way to estimate your per diem interest charge is to research rates for the type of mortgage you expect to get. Keep in mind that your rate is determined not only by prevailing market rates, but also by your financial profile, especially your credit score. Most homebuyers in the U.S. get a 30-year conventional mortgage, but 15-year mortgages often charge lower interest rates.

How to limit your per diem interest costs

If you want to limit — or avoid — per diem interest costs, be aware that not all lenders charge for it. You’ll rarely see this advertised, but you can compare loan estimates to see if an interest charge is listed with your other prepaids. Some lenders may also waive the charge if you ask.

To limit your per diem interest costs, your seller may also agree to arrange a closing date at the very end of the month.

FAQ

• What happens if I don’t pay per diem interest?
  

  It would be difficult not to pay per diem interest if your lender charges it, as it’s part of the total amount that you must pay at your home closing. If you don’t have enough cash to close, your closing could be delayed and your home purchase may fall through.

• Why do you have to pay prepaid interest at closing?
  

  Lenders charge per diem interest to ensure that they’re paid from the time they fund the loan, even if its regular repayment period hasn’t begun.

Additional reporting by Emma Woodward