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When you buy a home using a mortgage loan, you’ll owe a whole list of fees and charges (also called closing costs) on the day you close your loan.
One of those fees is per diem interest, and depending on your interest rate and loan closing date, it can often amount to a hefty sum of cash. Per diem interest is probably one of the lesser-known closing costs — here’s what you need to know to be prepared for this expense.
Dig deeper: What to expect when closing on a house
In this article:
What is per diem interest?
Per diem means “per day” in Latin, so “per diem interest” is the daily interest rate you’ll pay on your mortgage loan.
Knowing this number is important because, on closing day, you’ll need to pay your lender per diem interest for each day until your first mortgage payment is due.
For example, if you close on your loan on Dec. 15 and your first payment isn’t due until Jan. 1, you’ll owe 16 days of per diem interest on closing day (for Dec. 16 to 31). This is often referred to as “prepaid interest,” as it compensates your mortgage lender for the upcoming gap between payments.
Read more: How long does it take to close on a house?
Per diem interest calculation
Calculating per diem interest requires two pieces of information: your interest rate and the total loan amount. You’ll multiply your loan amount by the interest rate, then divide by 365 to get your daily interest rate charge.
Once you know this and have a closing date, you can figure out how much you’ll have to bring to closing. For instance, if your closing day is scheduled for Nov. 10, that leaves a 20-day gap between closing and when your first payment is due. So, you’d take your per diem interest rate and multiply that by 20. This would give you the total per diem interest charges you’d need to bring to the closing table.
Here’s an example using a $350,000 loan amount, a 6% interest rate, and a Nov. 10 closing date.
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$350,000 x 0.06 = $21,000 in interest per year
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$21,000 / 365 = $57.53 in interest per day
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$57.53 x 20 = $1,150.60
In the above scenario, you’d owe just over $1,150 per diem interest on closing day.
When you apply for your loan, your lender should give you an official Loan Estimate form that breaks down all of your expected closing costs. You’ll find your estimated per diem interest charges on page 2 of the form. Remember, it may show up as “prepaid interest” on the Loan Estimate.
Learn more: Cash to close — What you’ll owe on closing day
How to reduce your per diem interest
The best way to pay less per diem interest would be to close on your loan as late in the month as possible. Why? Because many mortgage lenders start your loan repayment on the first day of the month, and you want the fewest number of days in between as possible.
To do this, you’ll need to talk to your agent about negotiating an end-of-month closing date with the seller. Depending on their goals, they may or may not agree. (For example, if they’re closing on a new house early in the month, they may not want to have two mortgages for that long.)
A lower interest rate would also help you pay less per diem interest. You can achieve this by increasing your credit score before applying for your loan, making a larger down payment, or using a rate buydown, which lets you purchase a lower interest rate either permanently or for the first few years of the loan.
In some cases, your lender may agree to give you credits to cover some or all of your per diem interest. This might happen if you were supposed to close near the end of the month, but closing gets delayed, and the closing day gets pushed to the beginning of the following month. This way, you’re on the hook for fewer days of interest for the new month.
Dig deeper: How to get the lowest mortgage rate possible
Per diem interest FAQs
How can you avoid per diem interest?
You can’t avoid per diem interest on a mortgage, but there are some scenarios in which your lender may agree to give you credits to cover these fees. You can also reduce your per diem interest by closing later in the month or securing a better interest rate.
Is per diem interest the same as APR?
Per diem interest refers to the interest you pay daily on your mortgage loan. APR (annual percentage rate) is the total amount of interest and fees you’ll pay on your mortgage across an entire year.
Is per diem interest prepaid?
Yes, per diem interest is one of several prepaid charges you’ll owe to your lender on closing day. It compensates the lender for the number of days between closing day and the due date on your first mortgage loan payment.
This article was edited by Laura Grace Tarpley.