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Per Diem Interest
Per diem interest refers to the interest owing to the lender for the days between the loan closing date and the first payment due date.
Assuming a loan is closed on the 15th of June and the first payment due date is the 1st of July. While the mortgage is amortized according to the first of July as the commencement date, a bank will not allow this 15 days before the first of July to be free of interest since the funds were disbursed on the 15th of June.
Instead of lumping this outstanding interest cost together with the first payment which the borrower has to make soon, they will demand payment of interest for these 15 days at closing as per diem interest.
Part of this practice is also for cleaner accounting purposes.
So to minimize this cost, a buyer might want to schedule a closing date to be as close to the first payment date as possible if it is within his control.
Because frankly speaking, this is a cost that can be easily avoided with simple planning.
However in some cases, when the closing date is just 1 or 2 days after a payment calendar day, a lender might not collect a per diem interest at closing and choose to instead allow a rebate on the first payment amount.
For example, if the closing date is 3rd June and first payment date is 1st July, a lender might amend the first scheduled payment amount by deducting 2 days of interest off it.