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Explaining Why Per Diem Is Not A Closing Cost

Line 901 of a mortgage settlement statement is commonly confused for a closing cost.  It's actually an "advance payment" on the mortgage.

Often called a per diem by mortgage professionals, line 901 itemizes a borrower's prepaid mortgage interest charges due at closing.  The total amount due equals the daily rate of interest multiplied by the number of days remaining in the month.

If a mortgage funds on September 28, for example, the per diem would be 3 days.

One reason why per diem is due at closing is because mortgage interest is billed in arrears.  That means that on the first of every month, the mortgage interest that accrued in the month prior is due. 

Now, in the scenario above in which the closing is set for the last Friday of the month, it is highly unlikely that a mortgage lender would receive the loan documents from closing, process them through quality control, and then get a statement to the new borrower in time for the borrower to make his mortgage payment Monday morning.

Even with a 15-day grace period, it's a challenge.

So, to keep life simple, lenders collect all of the interest that would normally accrue up to the date of first payment at the time of closing.  Then, when the 1st of the month arrives, there is no payment due -- it was already paid at the time of closing.