FHA Loan PlusHow Is Per Diem Interest Calculated?
Do I make a mortgage payment at settlement?
Per diem interest is the interest that a lender charges on a loan.
It is typically applied to a mortgage loan during the closing or
refinancing process. Per diem is the Latin term for each day,
therefore per diem interest literally means daily interest.
Understanding the terms of per diem interest and how it works will help you avoid unexpected expenses during the process of refinancing or closing.
When you close or settle your loan, you will pay interest on the loan from the settlement date to the end of the month. Per diem interest is a fancy way of saying you are paying interest per day or per diem. Per diem interest is a cost for the daily interest for the days that fall between a loan closing date and the last day of the month.
If you close on the 15th day of the month, you will pay the lender 15 days interest, assuming there are 30 days in the closing month. Included in the calculation is the closing date.
Example of Per Diem Interest
At closing, you pay interest on the loan amount from the settlement date until the end of the month. The calculation includes the settlement date.
Did I lose you? Perhaps an example will help.
Let's assume that your settlement date is on May 15th. And as you know, there are 31 days in the month of May. You own the loan beginning on the 15th. The lender charges you interest on the loan from the 15th to the 31st, 16 days. Also included is the settlement date.
Think of per diem interest as an interest only mortgage payment for the closing month.
First Mortgage Payment Due Date
Using the preceding example, you close on May 15 and your first mortgage payment is due on July 1st. Most people would think that the 1st mortgage payment would be due in June, but not with mortgages.
Mortgage payments are not for the current month, but for the previous month. July's mortgage payment is paying for the month of June.
The term “paying in arrears” refers to the practice of paying interest on a mortgage loan one month after it has accumulated. The reason for the arrears' payment is that lenders cannot collect interest on days that have yet to occur.
Per Diem Interest Calculation
The per diem interest calculation is very simple. Multiply the loan amount by the interest rate, then divide the total by 365 days. The result is the per diem cost of the loan. Now multiply the daily interest rate by the number of days in the settlement month. Here's an example of the calculation:
| Loan Amount | X Interest Rate | = Total Interest | Number of Days in a Year | Daily Interest Cost | Multiply by | = The number of days owed | Total per diem interest paid |
|---|---|---|---|---|---|---|---|
| $100,000 | 3.00% | $ 3,000 | 365 Days | $ 8.22 | X | 16 Days | = $ 131.51 |
Why Should I Care About Per Diem Interest?
Borrowers pay the per diem interest at settlement. Per diem
interest is a prepaid cost. If you close on the last day of the
month, you will only have one day of interest. But, if you close on
the 1st day of the month, you could have 28, 30, or 31 days of per
diem interest.
Another example:
Close on the last day of the month with a loan amount of $200,000 at 5% for 30 years.
1. $200,000 X 5% = $10,000/365 = $27.40 (per day) X 30 days = $821.92
2. $200,000 X 5% = $10,000/365 = $27.40 (per day) X 1 day = $27.40
If you barely have enough money to cover the down payment, closing costs, and prepaid costs (i.e., real estate tax escrow, homeowner's insurance, etc.), closing on the last day of the month, makes sense. But there is a downside to closing on the last day of the month.
Remember, your mortgage payment pays for the previous month. Close on the last day of the month, and your first mortgage payment is due July 1st. A total of 31 days. Close May 1st and your first mortgage payment is due in 60 days.
Per Diem Interest Calculator
You can use the per diem interest calculator to estime the per diem interest for a mortgage.
Conclusion
Per diem interest is the interest that a lender charges on a
loan. It is typically applied to a mortgage loan during the closing
or refinancing process. When you close or settle your loan, you will
pay interest on the loan from the settlement date to the end of the
month.
The per diem interest calculation is very simple. Multiply the loan
amount by the interest rate, then divide the total by 365 days.
Close on the last day of the month with a loan amount of $200,000 at
5% for 30 years.