Per Diem Interest is a form of interest paid on a loan on a daily basis. Hence the name Per Diem which is Latin for per day. It is commonly used in mortgage loans at the time of closing or refinancing a property. Lenders typically require per diem interest for the short time period between the closing date and the start of the next month, when regular mortgage loan payments begin.
For example, Let’s say a loan for a property is closed on the 20th of the month and the lender requires initial repayment on the 1st of the next month. During the period between the 20th to the 1st, the lender will usually require the buyer to pay per diem interest on the loan until the 1st. On the 1st, both regular principal payments and interest payments will officially start.
Calculating per diem interest rates is rather simple and straightforward. Let’s say that a borrower took out a mortgage loan to buy an investment property and the loan amount is $200,000 with a 4% fixed interest rate. This makes the total yearly interest $8000. After dividing the yearly interest of $8000 by 365 the number of days in a year the daily interest cost is $21.92. Since the borrower closed the loan on the 20th, the lender will multiply $21.92 by 10 or the remaining days in the month. The lender will then require that the borrower pay $219.20 upfront for the period until the regular principal and interest payments start.