What is per diem interest, and how does it work?

Do you make a mortgage payment at closing?

Per diem interest calculatorThe term per diem rate of interest describes the interest charged on a loan daily

This type of interest is most often found on mortgages, but can also be used in other types of loans. The closing date and the last day of the last month are used to calculate how much per diem interest will be paid to the lender. The per diem interest calculation includes the closing date. Per diem interest is a prepaid expense.

Per Diem Interest Calculation Example

The per diem interest calculation is rather straightforward.

  1. Calculate the 365-day total by multiplying the loan/mortgage amount by the rate of interest.
  2. Now divide the total annual interest (as calculated in step one) by 365 days (some lenders use 360 days).
  3. Following the division, you will arrive at the daily interest rate (per diem).
  4. The daily interest rate is now multiplied by the number of days from the closing day to the day of the month. The settlement date is included. For example, if the closing day is November 15th, the calculation calls for 15 days.

Loan Amount – $100,000

X interest rate (assume 4%)

= $4,000 (annual interest)/365 days = $10.96/per diem interest

X 15 days (close on the 15th) = $164.40

When Is My First Payment Due?

When you close on your new home, there are several important dates to know. One of those is the closing date, which is the day that the title to the property officially transfers from the seller to the buyer. Another key date is the first payment date, which is when your first mortgage payment is due.

Your lender will calculate your closing costs and prorate your per diem interest on your loan based on the number of days between the closing (settlement) date and the last day of the month. The per diem interest calculation includes the closing date.

Therefore, if your closing date is closer to the end of each month, you will owe less interest than if your closing date is later in the month.. In other words, if you close on the 1st day of the month, you will pay interest from the first to the last day of the month. If you close on the last day of the month, you only pay one day's interest to the lender.


When Do I Need to Start Making Payments on My Mortgage?

In order to understand how mortgage payments work, it is important to understand the terminology. One key term is “arrears.” Arrears refer to the fact that mortgage payments are always made in arrears. This means that when you make a mortgage payment, the payment is for the previous month, not the upcoming month.

For example, if your closing date is January 15 and your first monthly mortgage payment is due March 1, your March mortgage payment will be for February. Per diem interest is calculated based on the number of days from the closing day to the last day of the month. Thus, on January 15, you'd owe 16 days of interest (the current date is included).

If you rented an apartment, you paid rent to the landlord and he or she allowed you to live in the apartment for the upcoming month. But mortgages are different, you make your payment for the previous month.

Another example, is if you close in January, you skip February and when March comes along, you make your 1st mortgage payment and that pays for February.

If you close in June, you will skip July and your first mortgage payment is due in August, which is paying for July.

How Can I Pay Off My Mortgage Quickly?

Use our Amortization calculator and plug in an extra payment or even a few dollars to see how fast you can payoff your mortgage.

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