What is this per diem interest on my mortgage Loan Estimate?
Short Answer:
Per diem interest is the daily interest charged on your mortgage. Typically, mortgage lenders collect interest from the date of the mortgage funding until the first of the next month.
Longer Answer:
Buying a house can be expensive. There is the down payment, closing costs to the lender, title company, transfer/recordation taxes to the county, City or state, and then prepaids. Prepaids are money paid in advance for reoccurring expenses. One such reoccurring expense is interest on the mortgage.
What is Per Diem Interest?
Per diem interest, Latin for "per day," refers to the daily interest accrued on a mortgage loan. Mortgage interest is paid in the arrears. When borrowers close on a mortgage, there is typically a gap between the closing date and the start of the new billing cycle. During this interim period, interest accrues on the loan amount on a daily basis, reflecting the cost of borrowing money from the lender.
How Per Diem Interest is Calculated
Calculating per diem interest involves a straightforward formula:
Per Diem Interest = Annual Interest Rate / Days in the Year × Loan Balance
The annual interest rate is divided by the number of days in the year (usually 365 or 360), and the resulting daily rate is multiplied by the outstanding loan balance. This calculation determines the amount of interest accrued each day during the interim period between the loan closing and the start of the billing cycle.
Implications for Mortgage Borrowers
Per diem interest can have several implications for borrowers:
- Closing Costs: Per diem interest is collected as part of the closing costs/prepaids associated with a mortgage loan closing.
- Closing Date Impact: The closing date of the mortgage transaction can affect the amount of per diem interest owed. Closing at the end of the month results in fewer days of accrued interest before the start 1st of the month. For example, your mortgage funds on May 31st, the bank would collect 1 day of interest.
- First Mortgage Payment: Per diem interest influences the timing of the first mortgage payment. Many times paying per diem interest pushes the first mortgage payment off by a month. Let's take that mortgage that closed on May 31st, you pay 1 day of per diem interest and your first mortgage payment would not be until June 1st.
Conclusion
Per diem interest is a fundamental aspect of mortgage lending, reflecting the daily cost of borrowing money until the start of the billing cycle. While it may seem like a minor detail in the mortgage process, understanding per diem interest and its implications can help borrowers make informed decisions and manage their finances effectively. By factoring per diem interest into their budgeting and planning, borrowers can navigate the mortgage journey with confidence and clarity.
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These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.
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