What is Per Diem Interest?
Per diem interest is the amount of interest you pay each day for your mortgage between signing papers and your first payment. (The word Diem is actually Latin and it means day.) It is a good thing to know this information to help you be aware of interest costs from the day you close and sign paperwork to the day you start making regular monthly payments.
When you signed the paperwork and officially close on your mortgage loan your first official monthly payment is not due until the following first day of the month. If you close on the fifth of the month you will have a longer time between the close of your loan and your expected first monthly payment as compared to closing on the 27th of the month.
How Per Diem Interest Works
In most cases, the timing of closing on a home purchase does not neatly happen on the first of the month. This means your official first day of homeownership on the property will not add up to a complete month. The lender still needs to charge you something for borrowing money to become the owner of the home. This is when a per-day charge comes in as a solution. These charges are collected as prepaid charges due at the time of closing.
A Breakdown Numbers Example of Per Diem Charges
If you are borrowing $400,000 to purchase a home with an interest rate of 5% and you sign the official closing papers five days before the end of the month you will need to pay per diem charges for those five days before the next month starts.
To arrive at the number, you owe for a daily charge, your total loan amount is multiplied by the interest rate to get a daily interest number. Using the numbers above that would be 400,000x0.05 and then divided by 365. This results in a total of $56.79 this is then multiplied by the number of per diem days until the beginning of the next in the case of our example it is five. $56.79 x 5 is $237.95.
Do These Charges Differ Depending Upon the Lender?
Lenders do have differing policies when it comes to their per diem charge practices. Most lenders ask a borrower to pay these charges in one overall payment at the close of the home sale before your monthly payments take place.
Some lenders will allow a borrower to add this cost into the first monthly mortgage payment. It is a good idea to make sure you know that per diem charges are a part of your loan and how each lender will expect you to pay them. In many cases, this will require extra cash on the home buyers’ part at the close of the home sale.
Per diem costs can play a significant role in the amount of cash you are expected to bring to the closing table to officially take ownership of your new home. It is always wise to know and be aware of what to expect with closing costs so you are not surprised right before you are scheduled to sign your closing documents.