Per diem interest refers to the interest amount owing from the day of closing to the first day of the following month, which is the date of payment due.

It is also often referred to as the pro-rated interest.

Mortgage loan administration for almost all lenders almost always put the first day of the month as the payment due date.

This is to simplify and standardize accounting for housing loans.

As lenders are seldom charitable towards consumers, should a loan be closed in the middle of the month and the first payment due in approximately 45 days later, the bank expects interest to be paid for the 15 days from the closing date (when the funds were disbursed) till the first day of the next month.

In this example, let’s say the closing date is 15 March and the first payment for the period of 2 April till 1 May is due on 1 May. The interest for the period between 15 March to 1 April is the per diem interest.

This interest owing is not paid together with the first mortgage payment on 1 May.

Instead a lender expects it to be paid during closing as part of the settlement costs.

As with the example above, a $200,000 loan at 7% will come up to an interest charge of ($200,000 x 7%) x (17/365) = $652.

In certain cases, especially when the closing date is very early in the month, the lender might be receptive in reversing the situation by granting an interest rebate for that few days and collect the first payment at the end of that month.

For example, the loan was closed on 2 March, the lender might propose to give the borrower cost rebates for the interest on that 2 days. The first mortgage payment will then be made in full by the borrower on 1 April.

If this is confusing, maybe just referring to this as pro-rated interest can help make it a clearer picture.