How to Calculate Per Diem Interest on a Loan

Per diem interest is the interest that accrues on a mortgage loan daily between the closing date and the end of the month.

It is calculated based on the loan amount, the interest rate, and the days between the closing date and the next mortgage payment date. The borrower typically pays the per diem interest at closing, which covers the interest between the closing date and the first mortgage payment.

It is a prorated amount of interest calculated based on the days between the closing date and the end of the month. 

How to Use a Mortgage Per Diem Interest Calculator

1. Determine the daily interest rate: Divide the annual interest rate by 365 days to get the daily interest rate. For example, if your mortgage has an interest rate of 5%, the daily interest rate will be 0.0137% (5%/365).
2. Determine the outstanding principal balance: Look for the principal balance on your mortgage statement or contact your lender for the latest balance information.
3. Calculate the per diem interest: Multiply the daily interest rate by the outstanding principal balance. For example, if the unpaid principal balance is $200,000, the per diem interest would be $27.40 ($200,000 x 0.0137%).
4. Determine the number of days: Determine the days you need to calculate per diem interest. This could be the number of days during the month when you made a payment or the number of days between two payments.
5. Calculate the total per diem interest: Multiply the per diem interest by the number of days. For example, if you need to calculate per diem interest for 15 days, the total per diem interest would be $411 ($27.40 x 15).
6. Add the per diem interest to your payment: If you are making a payment during the period for which you calculated per diem interest, add the total per diem interest to your payment. This will ensure that the correct amount of interest is paid for the exact number of days during the period.   

How to Use the Per Diem Interest Calculator

1. Enter the loan amount
2. Select the interest rate with the drop-down
3. Choose the proration period
4. If you are closing on the 15th day of the month, and there are 16 days remaining, choose 16 days. Lenders include the day of closing for the per diem interest calculation.

How to Reduce Your Per Diem Interest Charges

If you take a moment to calculate your per diem interest charges for your mortgage, you'll discover that closing on the first day of the month costs more than closing on the last day of the month. This is due to the borrower paying the lender for thirty or thirty-one days of interest on the loan. 

In contrast, if the borrower settles on the last day of the month, the borrower will only have to pay a single day per diem interest charge. Thus, if the borrower diligently manages their finances to cover their closing expenses, it would be in their best interest to seal the deal on the month's final day.

Should I Close on the First Day or the Last Day of the Month?

If you close at the beginning of the month, you'll have to pay more prepaid interest upfront because interest accrues from the date of the loan closing until the end of the month. However, if you close at the end of the month, you'll have less prepaid interest because you're closer to the end when the interest accrual stops.

So, closing at the end of the month may be slightly cheaper in terms of prepaid interest. Still, it's essential to consider other factors, such as your cash flow, the seller's preferences, and any potential risks that may arise from delaying the closing. Ultimately, the best timing for your closing will depend on your circumstances and should be discussed with your lender and real estate agent.

When is My First Mortgage Payment Due?

After you close your mortgage, the first payment is usually due on the first day of the following month. For example, if you close on March 15th, your first payment will be due on May 1st because you skipped the month after completing it.

You should check with your lender for the exact due date and grace period, if any, to avoid late fees. Your first payment covers the principal, interest, and other costs like property taxes and insurance.

The reason for skipping a month is that you pay interest in arrears, which means your payment is for the previous month, not the current month. So, if you closed in March and made a payment in May, the payment is for April.