How to Calculate Per Diem Interest on Mortgage

  Loan Amount  
  Interest Rate  
Annual Proration
  Number of Days    
  Daily Interest  

When taking out a new mortgage loan, one of the key terms you'll come across is "per diem interest." This refers to the daily interest charge lenders apply to your home loan. Understanding what per diem interest is and how your mortgage lender calculates it is essential. 

Understanding Per Diem Interest

Per diem interest is the amount that accrues each day on your mortgage loan, from closing until the last day of the closing month. 

The term "per diem" comes from Latin and means "per day." So, the per diem interest rate is the daily interest charge on your mortgage loan principal and accrued interest.

Calculating Per Diem Interest

Lenders use a simple formula to compute the per diem interest you owe on your home mortgage:

Per diem interest = (Mortgage loan amount x Interest rate) / 365 = daily interest

Breaking down the components of this formula:

  • Mortgage loan amount – The total principal borrowed, such as $250,000.
  • Interest rate – The annual rate on your loan, converted to a decimal. For a 4.5% rate, you would use 0.045.
  • 365 – The number of days a year to calculate the daily interest rate. 

Let's plug in some numbers to see how it works:

For a $250,000 mortgage loan at 4.5% interest:

Per diem interest = ($250,000 x 0.045) / 365 

Per diem interest = $30.68

With those terms, the per diem interest owed is $30.68 daily.

Factors Affecting Per Diem Interest

When calculating your per diem interest charge, there are a few key factors at play:

  • Mortgage loan amount – The higher the principal borrowed, the higher the per diem interest.
  • Interest rate – A higher rate increases the per diem interest owed. Even minor bumps significantly impact the daily cost.
  • Compounding – Interest builds on itself as you pay interest on accumulated interest. This causes the per diem to rise over the life of the mortgage loan.
  • Number of days – Per diem is calculated per calendar day. Months with more days mean more per diem interest.

Importance of Per Diem Interest

Understanding your per diem interest amount matters for two main reasons:

  1. Closing Costs – The per diem interest gets included in your final closing disclosure statement. It covers interest owed from the closing date through the end of the month.
  2. Amortization – The per diem also affects how your mortgage loan amortizes over the full term. On a fixed-rate loan, a higher per diem means greater total interest paid. 

Estimating Per Diem Interest

The per diem interest you owe will depend on your specific loan amount, interest rate, and the timing of your closing and first payment date. 

Let's look at some examples to see how the per diem cost differs:

- A $200,000 loan at 4% interest has a per diem of $21.92.

- On a $300,000 loan at 4.25%, the per diem is $35.34.

- For a $500,000 mortgage at 3.875%, the daily interest is $53.01.

As you can see, per diem costs scale up quickly with more significant loan amounts and interest rates.

Estimating and Reducing Per Diem Interest

When shopping for a mortgage loan, you can take these steps to estimate and lower the per diem interest costs:

  • Review loan estimates – Check the prepaid interest charges on lenders' Loan Estimates to see their per diem calculation. 
  • Ask about lower rates – Even tiny drops can significantly reduce the per diem.
  • Shorten days to first payment – Pick a closing date before the end of the month.
  • Buy down the rate – You may be able to pay points to get a lower rate and per diem interest.
  • Make an extra principal payment – This reduces the balance accruing daily interest after closing.

Final Thoughts on Per Diem Interest

The per diem interest rate is a critical factor contributing to your mortgage loan's overall cost donating to your mortgage loan's overall cost. Keeping an eye on minimizing the per diem as you shop for home loans can lead to significant interest savings over the life of your loan.