DEFINITION of 'Per Diem Interest'

The interest charge on a loan for one or more days. This does not necessarily mean that the interest on the loan compounds daily, per diem interest simply refers to the amount of interest that is due for one day that a loan is outstanding.

BREAKING DOWN 'Per Diem Interest'

For example, the per diem interest on a 30-year, $100,000, 8% mortgage that compounds monthly (based on a 360-day year) would be: ((.08/12) x $100,000) / 30 days = $22.22.

Per diem interest is calculated and paid at loan closings. It is the pro-rated amount of interest due for remaining days in a month. For example, if a mortgage closes on July 29, per diem interest is calculated for July 29, 30 and 31.

The first monthly payment is then due September 1 and covers interest for the entire month of August. Alternatively, if the loan closing date had been closer to the middle or beginning of the month of July, the borrower could elect to make the first monthly payment on August 1, in which case the borrower would have been credited per diem interest at closing for those days in July before the mortgage closed.

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