Every homeowner pays per diem interest, but timing can play a significant role in how it impacts your wallet.
Joining the homeowners club means you’ll learn many new words in the mortgage world. One of them is per diem interest, which will inevitably come up when obtaining a new mortgage loan or paying off an existing one. You may have some control in the matter though, as you can work with your mortgage lender to time it to work best for you. It all comes down to when you’re closing on your home and when the first payment is due. Consider per diem interest one of those random homeowner things you didn’t know you needed to address. It comes with the territory.
What is Per Diem Interest?
Per diem interest is calculated by day, specifically the days between the closing date of your mortgage loan and the date when your first mortgage payment is due. For example, if you’re closing on your home on May 4, but your first payment is due on June 1 (as most pay cycles start on the first of the month), you’ll pay per diem interest for each day between those dates. But if you close on May 25 and your payment is due on June 1, you need to pay less per diem interest. That might not necessarily be ideal, though.
“By paying more per diem up front, you can potentially extend your first full mortgage payment out to the following month versus making your first full mortgage payment sooner and limiting per diem,” says Ken Sisson, realtor and licensed real estate broker Coldwell Banker Realty. “This isn’t always possible to do, though. It depends mostly on when, in a given month, your loan closing is occurring.”
How Does Per Diem Interest Work?
Multiply your loan amount by the annual interest rate, then divide by 360 (days). That’s your per diem interest or daily interest rate between closing and the first payment.
“When you are getting a new loan or paying off an existing loan, there are a certain number of days of interest that need to be charged as part of the process of doing either of those things,” says Sisson. “Knowing the facts is important when it comes to planning out a closing date and controlling your finances in the short term.”
The Bottom Line
Per diem interest is just one of those closing costs homeowners must address before repaying their loan. You can have some control over the matter, though, so it’s not a bad idea to bring up per diem interest when you’re shopping around for a lender. With a little smart planning, you can make it work for your preference. “Per diem is a one-time thing, so that’s good!” says Sisson.
Why You Should Trust Us
From stock market news to mortgage insights, Benzinga serves around 25 million readers each month with the answers they want. We take pride in ensuring we have the most up-to-date information so you can make the best decisions for your financial health. Besides being experts ourselves, we regularly consult other real-world professionals for their takes.
Caitlyn Fitzpatrick, the author of this article, has been an editor and writer since 2014. She has covered a range of mortgage topics for Benzinga including using a HELOC and specialty loans, like a DSCR mortgage loan. To be sure we’re providing you with the most reliable information, we talked with Ken Sisson, realtor and licensed real estate broker Coldwell Banker Realty, to explain the ins and outs of per diem interest.
FAQ
How do you calculate per diem interest?
Per diem interest is calculated by multiplying the loan amount by the annual interest rate then dividing by 360 (days). “Technically, one would think that it should be divided by 365 days (or 366 days during a leap year) but no, most mortgage lenders will base it on the 30 day month or 360 days,” says Sisson.
How to avoid per diem interest?
You can’t totally avoid per diem interest however, you can smartly time out your closing date to be as late in the month as possible. Mortgage billing cycles typically begin on the first of the month but you can close on a home on any day. Let’s say you close on your home on April 29. If your first payment is due on May 1, then you only have to pay a couple days of per diem interest.
Is per diem the same as interest rate?
No, they’re not the same thing. Per diem interest is the daily interest that occurs outside of the standard repayment period. The interest rate kicks in during the repayment period.
Sources
- Ken Sisson, realtor and licensed real estate broker Coldwell Banker Realty
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.
