What is per diem interest?

Let’s begin this article with the meaning of “per diem”. Per diem is a Latin word for “per day”, or daily interest. This term is used in the finance industry to calculate the daily interest owed to the mortgage company at closing.

Home purchases

The bank will charge you interest on the loan from the day of closing until the end of the month. For example, let say you’re closing on the 1st day of September, you will pay the bank interest on the entire loan (mortgage) from the first day of the month until the last day of the month . . . 31 days . . . “per diem interest”. If your settlement occurred on the 15th day of the month, you would pay the bank 16 days interest (count the day of closing), and if you closed on the last day of the month, you would owe the bank one day of interest on the loan.

Per diem interest calculation

The per diem interest rate is easy to estimate. We’ll use a loan
amount of $100,000 for this example. The interest rate is 3% and
there are 365 days in the year. Closing is on the 15th day of
the month.

Step
1: Take the loan amount ($100,000) and multiply the loan
by the interest rate (3.000$) = $3,000

Step 2: Divide the total interest of
$3,000 by the number of days in the year (365). This is your
“per diem interest” = $8.22 per day. (Wow, that's how much the
bank earns every day for $100,000 at 3%)

Step 3: Multiply the daily per diem
cost of $8.22 by the number of days from the date of closing
until the end of the month. The number of days is 16, count the
day of closing.

The per diem interest paid at closing is $131.51.

Here's the mathematics for per diem. Too complicated? Use the
Per Diem Calculator
to estimate the monthly cost

Loan Amount | Interest Rate | Total Interest | Number of Days in a Year | Daily Interest Cost | Multiply by | the number of days owed | Total per diem interest paid |

$100,000.00 | 3.000% | $ 3,000 | 365 Days | $ 8.22 | X | 16 Days | = $ 131.51 |