How is per diem interest calculated for conventional loans?

Per diem interest for conventional loans is calculated using the principal balance multiplied by the interest rate, then divided by 360 days. This method is commonly used in the mortgage industry as it aligns with standard practices for calculating interest on loans, where a 360-day year is often utilized.

When you divide by 360, you are essentially determining the daily interest charge based on the amount borrowed. For instance, if you have a loan of $100,000 with an interest rate of 6%, the daily interest would be calculated as follows:

1. Multiply the principal balance ($100,000) by the interest rate (0.06).
2. Divide the result by 360 days.

This gives you a consistent daily cost of borrowing, which can be critical when determining the interest that accrues over days where a payment or loan adjustment is needed.

The use of a 360-day year simplifies calculations and is a standard practice in the finance industry, making option B the correct choice for calculating per diem interest on conventional loans.