Per Diem Interest Charged in Refinance

Dear Dr. Don,

My question is about per diem interest. I had a 20-year, fixed-rate mortgage at 5.1% 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

Dear 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.