Whether mortgage interest accrues daily or monthly depends on the loan product. Most standard fixed-rate mortgages backed by Fannie Mae or Freddie Mac use a monthly calculation on a 360-day year, so the interest charge is the same every month. Home equity lines of credit, simple interest mortgages, and some specialized loans accrue interest every calendar day on a 365-day year, so the charge changes with the length of the month and with exactly when you pay. Your promissory note spells out which method applies to your loan.1Fannie Mae Multifamily Guide. 30/360 Interest Calculation Method
How to Tell Which Method Your Loan Uses
The controlling document is your promissory note, followed by your mortgage contract. Check those before assuming, because the method is not always obvious from the monthly statement. As a general guide:
- Standard fixed-rate mortgages purchased or guaranteed by Fannie Mae and Freddie Mac generally follow the monthly 30/360 method for full monthly payments.
- Home equity lines of credit almost always calculate interest daily on the outstanding draw amount, with a variable rate tied to prime.
- Simple interest mortgages, a subset of conventional loans, accrue interest each calendar day rather than on a fixed monthly schedule.
- Bridge loans and other short-term financing typically use daily accrual.
One boundary worth flagging up front: even loans that use the monthly 30/360 method switch to a 365-day daily calculation for partial months, such as at closing or at payoff.2Fannie Mae. Fannie Mae Investor Reporting Manual So even a “monthly” mortgage charges you daily interest at the start and end of the loan.
How the Two Methods Actually Charge You
The 30/360 monthly method treats every month as 30 days and every year as 360 days. Your interest charge is identical from month to month as long as you pay within the grace period.
The actual/365 daily method divides the annual rate by 365 and charges interest for the exact number of days between payments. A February payment covers 28 days of interest; a March payment covers 31. Fannie Mae’s guidelines confirm that daily simple interest loans accrue on a 365-day basis up to, but not including, the date a payment is received that reduces the principal balance.2Fannie Mae. Fannie Mae Investor Reporting Manual
Put numbers on it. On a $300,000 balance at 6%, annual interest is $18,000. Under 30/360, the monthly charge is a flat $1,500 no matter which month. Under actual/365, the daily charge is about $49.32, so a 31-day month costs roughly $1,528.77 in interest and a 28-day month costs about $1,380.82.3U.S. Department of Housing and Urban Development (HUD). Interest Calculation Same rate, same balance, different totals over the year.
Why It Matters When You Pay
Most mortgages include a grace period of about 15 days before a late fee kicks in. On a 30/360 loan, using that grace period costs nothing beyond the timing itself — the monthly interest amount does not change. On a daily-accrual loan, it does. Interest keeps accumulating every day you wait, and the Federal Reserve has noted that payments made during the grace period on a daily simple interest loan result in more total interest paid, with an additional amount potentially owed after the last scheduled payment because of the extra interest that accrued along the way.4Federal Reserve Board. More Information About the Daily Simple Interest Method
Back to the $300,000 balance at 6%. Paying on the 15th instead of the 1st is roughly 14 extra days of interest, about $690 in additional charges for that single month. No late fee shows up on your statement. The cost hides inside the interest-to-principal split: more of your payment goes to interest, less to principal, and your balance drops slower than it should.
Why It Matters When You Pay Extra
Because a daily-accrual loan recalculates interest against the current principal balance each day, any extra principal payment immediately lowers the daily interest charge from that point forward. Send an additional $1,000 toward principal on a $300,000 balance at 6%, and you strip about $0.16 off every future day’s interest. Small daily, meaningful over decades, because every subsequent payment allocates a little more to principal.
Biweekly schedules amplify the effect. Twenty-six half-payments a year equals 13 full payments instead of 12, and the principal drops every two weeks rather than once a month. On a daily-accrual loan the savings are slightly greater than on a monthly-accrual loan, because the lower balance shows up in the very next day’s interest calculation rather than waiting for the next monthly cycle.
One thing to check before setting up biweekly payments: confirm with your servicer that extra funds are applied to principal immediately rather than held until the next scheduled due date. Some servicers park a half-payment until the matching half arrives, which erases the timing benefit.
Closing and Payoff Use Daily Interest Either Way
At closing, you typically owe interest from the closing date through the end of that month. This prepaid or per diem interest uses the daily formula even on loans that will later follow a monthly schedule, and it appears in the Prepaids section of your Closing Disclosure.5Consumer Financial Protection Bureau. Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure) Closing later in the month means fewer days of prepaid interest.
At payoff, the same rule applies. Your servicer issues a payoff statement with a “good-through date,” and if funds arrive after that date, additional daily interest has accrued and you need an updated quote. The statement lists a per diem amount so you can see the cost of any delay. On a $250,000 balance at 6.5%, that per diem runs about $44.52.2Fannie Mae. Fannie Mae Investor Reporting Manual
When Paying Late Makes the Balance Grow
If a payment does not cover all the interest that has accrued, the unpaid portion gets added to your principal balance. That is negative amortization, and it means your debt grows even though you are paying.6Consumer Financial Protection Bureau. What Is Negative Amortization
The clearest case is a payment-option adjustable-rate mortgage, where the minimum payment can fall below the fully amortizing amount. It can also occur on daily-accrual loans when payments consistently arrive late, because the extra days of accrued interest leave too little of the payment to cover the scheduled principal reduction. The unpaid interest compounds over time. If your loan offers a minimum payment option, covering at least the full interest each month keeps the balance from climbing.