How To Explain “Per Diem” and Why It’s 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.

The Week In Review (September 10, 2007) : What To Watch For

Weak employment data pushed mortgage rates lower last week.  Against expectations of 110,000 new jobs created in August, last Friday’s Non-Farm Payrolls report showed a loss of 4,000 jobs.

The story made headlines all over the country this weekend but its connection to mortgage rates is not always clear.  Here’s how the jobs report relates to mortgage rates:

1. An employed person earns an income
2. An employed person spends money on goods and services

When more people are employed, more U.S. dollars are circulated inside the U.S. economy.  It’s widely believed that two-thirds of the economy is the result of consumer spending, in fact.

So, because the economy showed job losses, market participants are predicting that the economy will start to slow down as fewer dollars are spent.  Fewer workers, in other words, equals slower growth.

Now, when the economy is growing quickly, the dollar is a risky investment because its purchasing power can weaken dramatically.  This contrasts with when the economy is slowing down, when the risk of devaluation (i.e. inflation) subsides. 

A less-risky dollar renders mortgage bonds more attractive for foreign investors because bonds are denominated in U.S. Dollars.  More demand for bonds leads to lower rates. 

And that’s the connection — fewer workers means slower growth means less risky dollars means more demand for mortgage bonds means lower mortgage rates.

This week, we’ll get to see if consumer spending habits are changing yet.  Friday, the Department of Commerce will release August’s Retail Sales report.  It’s expected to show a 0.3% increase over July.

(Image Courtesy: The Wall Street Journal Online)

Understanding Real Estate Terms: Absorption Rate

In light of last weeks New Homes Sales data and Existing Homes Sales report, let’s review a term that real estate professionals use to describe housing inventory.

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area. 

We can use it to determine how quickly homes are selling in a neighborhood, city, or region.

The formula to calculate Absorption Rate is simple:

• Add up the number of homes on the market
• Divide it by the number of homes taken off the market in the past 30 days because offers were accepted for the sale of those homes

For example, if 500 homes are on the market and 89 of these homes received offers in the past 30 days, the absorption rate is 500/89, or 5.6 months. 

In generally, the smaller the absorption rate, the more seller-friendly the region.