Per-Diem Interest
Definition and meaning of Per-Diem Interest in real estate.
Per-diem interest is the daily interest charged on a mortgage loan, calculated from the day of closing until the first day of the following billing cycle.
In more detail
Because home purchase loans are funded on the closing date, lenders charge per-diem interest to cover the time between funding and the start of the first full month. This charge is collected at the closing table as part of the buyer's prepaid closing costs. The amount of per-diem interest depends on the loan size, the interest rate, and the specific day of the month when closing occurs.
Closing later in the month minimizes the amount of per-diem interest a buyer must pay upfront at closing.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also Known As | Daily interest or prepaid interest |
| Paid At | Closing, as part of closing costs |
| Influenced By | Closing date and loan interest rate |
When a buyer closed their mortgage shortly before the end of the month, they paid several days of per-diem interest at closing to cover that short period before their first full monthly billing cycle began.
Frequently asked questions
How is per-diem interest calculated?
To calculate per-diem interest, multiply your loan balance by the annual interest rate, divide by the number of days in the year to get the daily rate, and then multiply by the number of days left in the month.
Does closing at the end of the month save me money?
Closing at the end of the month reduces the prepaid interest you must pay at the closing table. However, it does not change your overall debt, it simply shifts when you pay interest since your first regular payment will still be due at the same interval.