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What is 'Residual Interest'

Residual interest is interest that may accrue on an interest bearing account. Generally it is an interest charge that occurs in between statement disclosures. It may also be a type of interest payment received by investors in a structured credit investment product.

BREAKING DOWN 'Residual Interest'

Residual interest is interest that may occur on a standard credit account. It is also a type of interest that investors may receive when investing in structured credit products such as a real estate mortgage investment conduit (REMIC).

Residual Interest Charges

Residual interest on standard credit accounts is often identified when a borrower pays their account balance in full. It can confuse credit account customers who think they have paid off their balances. Paying the outstanding balance on a credit account that is quoted in a borrower’s monthly statement can be a good financial habit. While borrowers are only required to make a minimum monthly payment on revolving credit accounts many borrowers choose to pay their outstanding balance in full.

Most credit accounts calculate interest on balances daily. Typically the standard calculation divides the annual percentage interest rate (APR) by 365 days to arrive at a daily interest rate. While a borrower may choose to pay a credit issuer the outstanding balance on their monthly statement, they must understand that interest will likely be charged daily up until the day their payment is received. Generally a borrower may not receive their statement until at least one or two days after the closing date. They may also take four to five days to pay the quoted outstanding balance. This can leave approximately a week of daily accruing interest on their credit balance which is known as the residual interest. Thus, a credit account customer may payoff their balance but still be charged a small interest charge on their next statement due to the daily interest accrual up to the time when their payment was made.

Some credit card companies may allow for a grace period which gives account holders a specified time to payoff a balance with no interest accrual. Grace periods are often associated with accounts that are paid off in full each month. The terms for a grace period will be detailed in a cardholder’s account agreement.

Real Estate Mortgage Investment Conduit

A REMIC is one type of structured mortgage product that may pool either residential or commercial mortgages in a special purpose vehicle for investors. REMICs are typically structured with multiple tranches paying varying interest rates to investors. In some cases a REMIC tranche may be structured to payout an unspecified amount of interest that is based on cash flow available after higher seniority tranches have been paid. Thus some REMIC investors may receive residual interest payments after all the required regular interest has been paid to investors within higher priority tranches. Residual interest functions much like common shares in that preferred shareholders receive all required dividends before any amount remaining is divided among common shareholders.

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