refinance

Per diem interest charged in refinance

Don TaylorQuestionDear Dr. Don,
My question is about per diem interest. I had a 20-year, fixed-rate mortgage at 5.1 percent that I started paying April 1, 2005. Last year, I decided to refinance with another bank at a lower rate. I made a final payment of interest and principal April 1, 2010. The loan was paid in full April 12, 2010, and I was charged with 11 days' worth of per diem interest. My new mortgage's first payment was due May 6, 2010. My question is, should I have been charged this per diem interest, or should I have been credited this per diem interest?

Note that the wording on the documents states the due date of last payment is March 1, 2010, while the bank continues to accept full mortgage payments April 1, 2010, and then charges 11 days' worth of per diem interest through April 12, 2010. Does all this sound right? If it makes a difference, I'm Canadian and the mortgages are with Canadian lenders.
-- Dionysios Duped

AnswerDear Dionysios,
You've been agonizing over this for a year. Let it go. The April mortgage payment covered the interest expense for March, not April. If the first lender didn't receive the payoff balance until April 12, then you would owe the lender the 11 days' worth of per diem interest. An earlier column on per diem interest and how it affects refinance provides additional details.

With a refinancing, there can be overlapping days when you owe mortgage interest to both lenders. That overlap is something that you would have wanted to minimize. It's not clear from your message whether there was any overlap. A good rule of thumb to minimize the overlap is to not close on a refinancing on a Friday.

In the U.S. it's customary to have the mortgage payment due on the first of the month, although there is typically a grace period before the payment is considered late. That practice may be different in Canada, since you state that the new mortgage payment is due on the sixth of the month. I did learn that fixed-rate mortgages in Canada are based on semiannual compounding and that interest must be paid in arrears. The part about paid in arrears reinforces the point that the April payment covered March's interest expense.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

News alert Create a news alert for "refinance"

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
MORTGAGE & REAL ESTATE NEWSLETTER

Timely market news and advice for consumers ready to buy, sell or invest in real estate. Delivered weekly.

advertisement
Partner Center
advertisement

Connect with us