Loading the player...

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.

  1. Residual Standard Deviation

    The residual standard deviation is a statistical term used to ...
  2. Past Due Balance Method

    The past due balance method calculates interest charges based ...
  3. Available Credit

    Available credit is the unused portion of credit available for ...
  4. Minimum Monthly Payment

    The minimum monthly payment is the least a customer needs to ...
  5. Real Estate Mortgage Investment ...

    A complex pool of mortgage securities created for the purpose ...
  6. Grace Period (Credit)

    The number of days between a consumer’s credit card statement ...
Related Articles
  1. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, understand how it affects new purchases and other fine-print traps that can cost you.
  2. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  3. Personal Finance

    Get A Free Ride From Credit Companies

    Find out how to make your credit cards work for you - not against you.
  4. Personal Finance

    Trended Credit Data Could Increase Interest Rates for Borrowers (FNMA, EFX)

    Mortgage lenders will soon be required to use trended credit data to qualify borrowers. As a result, many borrowers could have to take higher interest rates.
  5. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  6. IPF - Mortgage

    Understanding the Mortgage Payment Structure

    When you get a mortgage to buy a home, you need to understand the structure of your payments, so you know how expensive the whole thing will ultimately be.
  7. Personal Finance

    Consumer Credit Card Balances Are Up $26 Billion

    Rising balances and credit limits may be fine for now, but with household debt rising faster than GDP, there could be consequences in the next few years.
  8. Personal Finance

    Credit Repair: How to Improve Your Credit Score

    There is no quick fix for a bad credit score, but there are several strategies you can take to improve your credit rating and save money over the long term.
  9. Retirement

    Retirement Savings Tips For Young People

    Learn how to avoid the bad habits that keep the average young adult from saving.
  1. How is residual value of an asset determined?

    Understand what the residual value of an asset is and how the residual value of an asset is calculated. Learn how residual ... Read Answer >>
  2. What is the difference between terminal value and residual value?

    Read a brief overview of residual value and terminal value, two near-identical terms that refer to the future value of a ... Read Answer >>
  3. How long are accounts receivable allowed to be outstanding?

    Learn about accounts receivable, including how long they typically remain outstanding, and how their payment or lack of payment ... Read Answer >>
Trading Center