How to calculate per diem interest

When you buy a home or refinance, you'll see a line item on your closing paperwork for per diem interest.¹ This is the daily interest on your new mortgage from the time of closing to the end of the month. Knowing how to calculate it or use a per diem interest calculator helps you budget for closing and choose a closing date that reduces how much you need to close.

Key takeaways:

• Per diem interest is the daily interest that accumulates on your loan between your closing date and the end of that calendar month.
• Closing later in the month shortens the period before your first official billing cycle, reducing the cash you need at closing.
• You can find your exact daily interest rate and principal balance details on your official loan documents or by speaking directly with your loan officer.

What is per diem interest?

"Per diem" is Latin for "by the day." Therefore, per diem interest is simply the daily interest that accrues on your loan. Specifically, for a mortgage, per diem interest covers the interim period between your loan closing date and the end of that calendar month.

Lenders charge this fee because mortgage interest begins accumulating the moment your loan is funded, but regular monthly mortgage payments are structured around full calendar months.

Because you are technically borrowing the lender's money during those final days of the closing month, you must pay for that specific timeframe.

Per diem interest is calculated as a prepaid cost and is bundled directly into your overall closing costs.

What’s the difference between per diem and prepaid interest?

Per diem interest often is confused with prepaid interest, which is a broader category of prepaid costs when buying a home. While per diem interest covers the daily interest for the period between closing on your mortgage and your first payment cycle, other types of prepaid interest serve different purposes.

For example, you may pay prepaid interest at closing to permanently reduce your loan's interest rate. This strategy refers to buying mortgage points, also known as discount points. One point costs 1% of your loan amount and typically reduces your interest rate by 0.25%. Borrowers can buy fractions of a point, down to 0.125 points.

Buying points makes financial sense if you plan to stay in the home long enough for your monthly savings on interest to outweigh the up-front cost.

How does per diem interest work on a mortgage?

Mortgage interest is paid in arrears, meaning when you make your mortgage payment, you’re paying for the interest that has accrued since your last payment. Because mortgage interest accrues daily, you must pay interest between your closing date and the dates covered by your first statement at closing.

Lenders collect this per diem interest in several ways. Most commonly, it is paid up front at the closing table as part of your overall closing costs. However, depending on your lender and whether you are purchasing or refinancing, it may be rolled into your first mortgage payment or paid as a separate lump sum.

Let’s say you close your mortgage on June 28. You would pay per diem interest for the period between June 28 – July 1 at closing. Your first payment would be due on Aug. 1 for the period covering July 1 – 31. The first payment comes sooner if you’re on a biweekly payment plan - it would be in July rather than August, which directly shifts your calculation away from a standard average mortgage payment schedule.

This makes the timing of a couple of mortgage events very important if you’re hoping to save money when closing on a house. To save on upfront closing costs, the best time of the month to close on a house is near the end of the month. This allows you to pay as little per diem interest as possible before dates covered by the first statement.

What is the per diem interest formula?

The formula for per diem interest is straightforward:

Daily interest rate × Loan amount × Days between loan close and the first of the month

To find the exact numbers you need for this calculation, you don't have to guess. Your specific loan amount and annual interest rate are clearly listed on your official Closing Disclosure, a document your lender is required to provide at least 3 days before you close.

If you are earlier in the process and trying to estimate these costs, you can pull these figures from your Loan Estimate or reach out to your lender to ask for your daily interest rate.

How to calculate per diem interest manually

The best way to get a feel for calculating per diem interest manually is to go through an example. Let’s start with a scenario:

• Interest rate: 6.81%
• Loan amount: $270,000
• Closing date: June 18

1. Convert to a daily interest rate

The first step is to convert your interest rate to a daily interest rate. Divide the annual interest rate by the number of days in a year. This is either 365 or 366 days, depending on whether it's a leap year and your lender's practices.

Annual interest rate ÷ Number of days in a year = Daily rate

In our example, it comes out to 0.019%.

Converting to a decimal now makes everything easier.

(6.81 ÷ 365) ÷ 100 = 0.00019

2. Multiply the loan amount by the interest rate

Next, multiply the loan amount by the daily interest rate to get the daily interest amount.

Loan amount x Daily rate = Per diem interest

Using the numbers in our example, it comes out to $50.38.

$270,000 × 0.00019 = $50.38

3. Count days between closing and the first of the month

Now, you need to count the days between your closing date and the first of the month. Since the closing date is June 18, it is 13 days away from July 1.

30 days in June - 17 days elapsed = 13 days

4. Multiply daily interest by the days between closing and the first of the month

Multiplying the daily interest by the number of days between closing and the first of the month will give you your total per diem interest owed at closing. Settling this amount covers your daily interest gap right up until your first mortgage payment is due.

13 × $50.38 = $654.94

How to make a per diem interest calculator

Because the formula is simple, if you’re good with spreadsheets, you can even make a loan per diem calculator to see the effect that closing on different days has on your cost. We’ll demonstrate a basic spreadsheet setup and provide the Excel formula for each step.

To build this calculator, set up your spreadsheet using the following layout, formatting, and formulas for row 2:

Here are step-by-step instructions:

1. Create your headers. Type the labels in Row 1 (Columns A through G) exactly as shown in the table above.
2. Enter your baseline data. In Row 2, type your closing date in A2, the first of the next month in B2, your loan principal in D2, and your interest rate in E2. Make sure to apply the correct cell formatting so the math works properly.
3. Input the formulas. Copy and paste the formulas into cells C2, F2, and G2.

Once your formulas are live, you can freely change the closing date in cell A2 to instantly see how different days of the month alter your upfront closing costs.

Does every lender charge per diem interest?

Per diem interest is standard because your loan starts on your closing day, and the first statement covers interest only from the first of the month forward. You can find out if and how much you're being charged by looking at your Closing Disclosure.

However, depending on your lender and the amount of the charge, you can ask the lender to waive the fee or apply it as a credit toward your per diem interest.

Taking the time to shop around for different lenders and carefully reviewing your loan estimates side by side can significantly affect your up-front costs, as some institutions offer more flexible terms or credit to stay competitive.

Knowing the right questions to ask a mortgage lender can help you negotiate these fees and lower your out-of-pocket expenses at closing.

FAQ

Here are answers to common questions about per diem interest.

What happens with per diem interest if my closing is delayed?

If your closing is delayed until later in the month, you can benefit from a lower per diem interest bill because there are fewer days left in the month. But if your closing is held beyond the first of the month, you could pay more. Because of this, knowing how long it takes to close on a house, managing the process effectively, and promptly returning all paperwork are essential to avoid unexpected delays that could increase your upfront costs.

Who pays per diem interest?

Because it's paid at closing, the buyer or the refinancing client can pay it or receive a lender credit toward per diem interest. If it's a purchase, you can also negotiate to have the cost covered through seller concessions, where the seller agrees to pay a portion of your closing fees to help lower your upfront costs.

What if I don’t pay per diem interest?

Because per diem interest is a mandatory closing cost, failing to pay it means your loan cannot fund, and your transaction will stall. If you don't bring these required funds to the closing table, you risk losing the property or having your mortgage denied after preapproval.

Is per diem interest included in my mortgage’s APR?

Yes, per diem interest is included in your mortgage's annual percentage rate (APR). While your base interest rate only accounts for the cost of borrowing the principal, your APR reflects the total cost of the loan over time, including lender fees, mortgage insurance, and prepaid items like daily interest. Because per diem interest is a necessary cost of getting the loan, federal law requires lenders to factor it into the overall APR calculation.

Is per diem interest tax-deductible?

Subject to limits, mortgage interest on primary and vacation homes is tax-deductible. Under current IRS rules, you can deduct interest on mortgage limits up to $750,000 if you’re married and filing a joint return or $375,000 if you’re single or married filing separate returns.

The bottom line: A per diem interest calculator can help you budget for closing day

When you close on a mortgage, you pay per diem interest covering the time between closing day and the first of the following month. This is the only time you need to worry about paying forward interest, because your mortgage statements are all based on past interest. A key to saving on per diem interest is closing late in the month.

If you’re ready to buy a home or refinance, explore your options today with Rocket Mortgage.

¹Refinancing may increase finance charges over the life of the loan.