To calculate per diem interest, multiply your current loan balance by the annual interest rate (as a decimal), then divide by the number of days your lender uses for a year, which is almost always 365 or 360. The result is the dollar amount of interest that accrues each day the loan is outstanding. That one line of math drives the prepaid interest on a mortgage closing statement, the daily accrual on a payoff quote, and the periodic rate on a credit card.
The Formula, With Real Numbers
Three inputs, one division:
Daily interest = (Principal balance × Annual rate) ÷ Day count
Take a $300,000 mortgage at 7.0%. Convert the rate to a decimal (0.07) and multiply by the balance: $300,000 × 0.07 = $21,000 in annual interest. Divide by 365 and the per diem charge is $57.53. Divide the same $21,000 by 360 instead and the daily figure rises to $58.33.
Two things to notice before you plug in your own numbers. First, use your current principal balance, not the original loan amount. On an amortizing loan, principal drops every month and the per diem drops with it. A borrower who made an extra payment in January will have a lower per diem in February than one who paid only the minimum. Second, this formula assumes simple interest, where the daily charge is based only on principal and unpaid interest does not fold back into the balance. That holds for most mortgages. Credit cards work differently, which the compounding section below covers.
Check Which Day Count Your Lender Uses
The denominator matters more than most borrowers expect, and the convention is buried in the loan agreement. Look in the interest or definitions section for phrases like “actual/365,” “actual/360,” or “365/360.” If you cannot find it, ask the lender in writing.
365-Day Year
Residential mortgages and standard consumer loans typically divide by 365. This tracks the calendar and produces the lowest daily rate of the common methods. Whether the denominator shifts to 366 in a leap year depends on the specific contract. Some use a “fixed 365” that never changes; others switch to 366 whenever the accrual period includes February 29.
360-Day Year
Commercial lenders and many business lines of credit use a 360-day year, sometimes called the Banker’s Year, which treats every month as 30 days. A smaller denominator means a higher daily rate. On the $300,000 loan at 7.0%, the 360-day convention yields $58.33 per day against $57.53 under 365. Over an actual 365-day year, the borrower pays slightly more than the stated 7.0% in effective interest.
365/360 Hybrid
Some commercial and adjustable-rate loans compute the daily rate using a 360-day denominator and then charge that rate for all 365 days in the calendar year. The effective annual rate ends up roughly 1.39% higher than the stated rate. A loan quoting 8.0% under 365/360 actually costs about 8.11% a year. If the loan documents say interest is “computed on a 365/360 basis,” use 360 as your divisor when figuring the daily charge, and expect the annual total to exceed the headline rate.
Simple Versus Compound Daily Interest
The formula above gives you the correct daily charge on a simple-interest loan. Most traditional mortgages work this way. Interest accrues on principal only, and payments reduce that principal on a set schedule.
Credit cards and some private loans compound daily. The issuer calculates the daily charge the same way, balance times rate divided by day count, but then adds that day’s interest to the balance before calculating the next day’s charge. On a card with a 24% APR and a 365-day year, the daily periodic rate is 0.0657%. On a $3,000 balance that is $1.97 for day one; on day two the balance is $3,001.97 and interest runs against the new figure.1Consumer Financial Protection Bureau. What Is a Daily Periodic Rate on a Credit Card? Day to day the effect is small; across a billing cycle or a year it is why card balances grow faster than the stated APR suggests.
Running the Number at Closing
Mortgage closings almost never fall on the first of the month, and mortgage interest is paid in arrears. Your first scheduled payment will not cover the days between closing and month’s end, so the lender collects that stub period at the closing table as “prepaid interest.” It is just the per diem rate times the number of remaining days in the month.
Close on September 20 with a per diem of $57.53, and you owe prepaid interest for September 20 through September 30, eleven days: $57.53 × 11 = $632.83. Your first regular payment, due November 1, then covers October in full. The charge shows up on page 2, section F of the Closing Disclosure under prepaid charges.2Consumer Financial Protection Bureau. What Are Prepaid Interest Charges?
Closing later in the month means fewer prepaid days at the table. Someone closing on the 28th pays two or three days; closing on the 2nd pays nearly a full month. The total interest over the life of the loan does not change, but the cash needed at closing does.
Running the Number on a Payoff Statement
When you pay off a mortgage through a sale, refinance, or lump sum, the servicer issues a payoff statement with the total needed to zero out the loan as of a specific “good through” date. Accrued interest in that figure is calculated at the per diem rate.
Payoff statements are typically good for 10 to 30 days, and they list the per diem separately so that extra days can be added if the funds arrive late. Say the statement shows $198,412.56 good through June 15 with a per diem of $38.22, and the wire does not land until June 18. The amount actually due is $198,412.56 + ($38.22 × 3) = $198,527.22.
Federal law requires your servicer to send an accurate payoff balance within seven business days of a written request.3Consumer Financial Protection Bureau. 12 CFR 1024.34 – Timely Escrow Payments and Treatment of Escrow Account Balances Request yours well ahead of your target date so there is room to coordinate the wire without burning daily interest.
When Your Number Doesn’t Match the Lender’s
If you run the formula and come out close to the lender’s figure but not exact, check the day count first. A loan you assumed was actual/365 might be 365/360, and that single change moves every daily number. Next, confirm the principal balance you used matches what the lender used. Your most recent statement balance can be stale if a payment has posted since, or ahead of the lender’s figure if a payment has been sent but not yet applied. Those two reconciliations resolve most discrepancies. If a gap remains after both, raise it with the servicer in writing and ask for the inputs they used.