Per Diem Interest on an FHA Mortgage


	PER DIEM INTEREST CALCULATOR
	Loan Amount
	Interest Rate
	Annual Proration
	Number of Days
	Daily Interest
	Result

Understanding mortgage payments may be challenging, particularly when they involve per diem interest. This article will go through the specifics of how per diem interest on a home loan is calculated.

We will define per diem interest, how it relates to mortgages, and the variables that might affect the per diem interest rate.

By the conclusion of this article, you ought to know more about per diem interest and how it impacts your mortgage payments.

What Is Per Diem Interest, and How Does It Work?

Per diem, or daily interest, is a type of financial charge that typically applies to loans and investments. It's calculated by multiplying the principal balance, or the amount being borrowed or invested, by the applicable interest rate for a single day. Per diem interest can be beneficial in certain situations but can add up quickly if not monitored closely.

You will pay interest on the loan from the settlement date through the end of the month when you close or settle your loan. Paying interest per day or per diem is called paying per diem interest. The daily interest cost between the loan closing date and the month's last day is per diem interest.

Assuming there are 30 days in the closing month, if you close on the 15th, you will pay the lender 15 days' interest. The closing date is taken into account in the calculation.

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 May 15th. And as you know, there are 31 days in May. You own the loan beginning on the 15th. The lender charges interest on the loan from the 15th to the 31st, or 16 days. Also included is the settlement date.

Think of per diem interest as an interest-only mortgage payment for the closing month.

How to Calculate Per Diem Interest on Your Mortgage

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.

$200,000 X 5% = $10,000/365 = $27.40 (per day) X 30 days = $821.92
$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, 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 is for the previous month. Close on the last day of the month, and your first mortgage payment is due July 1st—31 days. Close on May 1st, and your first mortgage payment is due in 60 days.

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 the first 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 for June.

The term "paying in arrears" refers to 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.

Conclusion

To summarize, per diem interest is a crucial part of a mortgage. Making informed judgments regarding their loans may be facilitated by having a solid understanding of how they work and how to calculate them. The total cost of a loan, including per diem interest, should be understood by borrowers. They may make the best financial choices for themselves and their family with this information. It's also critical to comprehend how altering loan conditions can affect daily interest payments.

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