How to Calculate Per Diem on a Mortgage

Whether you are on your first home or one of many real estate purchases in your life, applying for a mortgage remains a significant moment. Committing to this long-term borrowing and repayment scheme is a huge responsibility that carries significant implications for the mortgage applicant. Taking the time to thoroughly research the details of repayment is absolutely essential.

For some borrowers, knowing exactly how much they will be paying in interest on a daily basis is valuable information. If this idea appeals to you, you can use a few straightforward steps to become your own daily mortgage interest calculator.

TL;DR (Too Long; Didn't Read)

Calculating your mortgage per diem may help you gain a realistic understanding of how much money you are routing to your home payments on a daily basis. With this information, you can also work backward to convert a per diem to an interest rate.

Mortgage Interest Basics

When a borrower applies for a mortgage, their specific financial history will directly influence the interest rate they are offered by their lender. Interest rates are often considered to be a direct measure of the risk profile of the loan applicant. As the level of risk associated with a specific borrower increases, interest rates can be expected to follow suit. When speaking of risk, this refers specifically to the risk of the borrower defaulting on their loan and facing foreclosure.

Although the lender regains possession of the borrower's property during a foreclosure, this is in no one's best interest. With that in mind, lenders will often engage in extensive risk profiling to ensure that the potential for default is minimized as much as possible.

Mortgage Interest Accrual

When interest accrues on a mortgage, it can either do so in the form of simple interest, which remains isolated from the principal balance as it accrues, or as compounding interest. In a situation where interest is being generated on a loan with compounding interest, any unpaid interest that has been generated will be folded directly back in to the principal balance. As can be imagined, this process can rapidly increase the size of the debt burden over the lifespan of the mortgage.

The vast majority of mortgages do not involve compounding interest, if only because very few homebuyers would be willing to take on this type of debt burden. That being said, mortgage applicants should always carefully review the terms of their borrowing in order to ensure that they know the exact manner in which interest will be accounted for.

Daily Mortgage Interest Calculations

Although you could pull out your computer and calculate daily interest using Excel or some other sophisticated application, this task can actually be completed using a few simple mathematical formulas. As a first step, take a look at the annual percentage rate, or APR, attached to your mortgage. You can use this number to calculate exactly how much interest you will be paying per year.

So, if you have a $400,000 mortgage with a 4.3 percent APR, the interest that would accrue on your mortgage the first year is equivalent to 4.3 percent of $400,000, or $17,200. This result was calculated by multiplying 400,000 by the decimal equivalent of 4.3 percent, or .043.

Now that you have an understanding of exactly how much interest you will be paying over the course of one year, you can divide this sum by 365 to determine your daily per diem interest charges. So, in this example, $17,200 divided by 365 is equal to $47.12 of interest paid on a daily basis. To calculate your total per diem including principal, you can take principal balance, divide it by the total number of days in the lifespan of the mortgage, and add this to the per diem interest.

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