Basis Point Overview

It is unlikely that you will get far in your mortgage education without having heard the term "basis points". Let's find out what it means and how it affects your mortgage.

It's Industry Gibberish

Basepoint is a term used in the mortgage industry and overall financial services industry to refer to differences and changes in interest rates.

One basis point equals one-hundredth percent of a percentage or 0.011%.

One percent is, therefore, one hundred basis points

If you get a mortgage rate quote at four percent and then it changes to 4.25 percent the following week, it means that it has risen by 25 basis points.

You can abbreviate plural usages "basis points" with bps (pronounced "bips"). In the above example, you could say that your quote rose 25 bps.

Why Is It So Precise?

Why do we need to consider rates as low as a hundredth of a percent? When you are talking about large loans like a mortgage, every penny is important.

Let's look at two forms of rate quotes to illustrate the point:

Your Quoted Rate:

This is the actual interest rate you pay on your mortgage. Mortgage lenders usually quote in increments.125 percent. For a $300,000. loan, each 12.5-basis point increase up or down will change your monthly principal and/or interest payment by $22 and your monthly interest cost by $31.

Annual Percentage Rate (APR):

This is the amount of your rate if all closing costs were included in it. Federal Truth In Lending laws require that an APR disclosure be made on all rate quotes. APRs include line-item costs. They are usually disclosed with three decimal places to ensure as much detail as possible. When comparing APRs between lenders, the basis points are very useful. When comparing APRs from lender to lender, if you get four-percent rate rates from two lenders and one has a 4.31 percent APR while the other has a 4.011% APR, two basis points will give you a strong indicator that the closing cost line items of both lenders will be very similar once you see them. If your APRs were 4.161 percent and 4.031 percent for the same four percent rate quote, then you would know that the APR with 13 basis points more will have higher closing cost line items.