What is basis points in mortgage?

Introduction

Basis points in mortgage refer to a unit of measurement used to express changes in interest rates. When discussing mortgage rates, it is common to hear about changes in basis points. In this article, we will dive deeper into what basis points are, how they are calculated, and why they are important in the mortgage industry.

Understanding Basis Points

Definition: Basis points, often abbreviated as “bps,” represent one-hundredth of a percentage point. It is a way to measure small changes in interest rates, yields, or other financial metrics. For example, if a mortgage rate increases by 25 basis points, it means the rate has gone up by 0.25%.

Calculation: To calculate basis points, you divide the change in percentage points by 0.01. For instance, if the mortgage rate increases from 3.75% to 3.95%, the change is 0.20%. Dividing this by 0.01 gives us 20 basis points.

Significance: Basis points are used to express small changes accurately. When dealing with large numbers or percentages, using basis points allows for more precise communication. It helps avoid confusion and ensures that everyone understands the magnitude of the change being discussed.

Application in the Mortgage Industry

Mortgage Rates: Basis points play a crucial role in mortgage rates. Lenders often advertise their rates in terms of basis points to provide a clear understanding of the interest rate changes. For example, a lender might offer a mortgage rate of 3.50% plus 100 basis points, which means the actual interest rate is 4.50%.

Rate Changes: When mortgage rates change, they are typically reported in terms of basis points. News outlets and financial institutions use this unit of measurement to convey the magnitude of the rate change accurately. For instance, if mortgage rates increase by 50 basis points, it indicates a significant shift in interest rates.

Comparison and Analysis: Basis points allow borrowers to compare different mortgage offers more effectively. By comparing rates in basis points, borrowers can easily identify the differences between various loan options. It helps them make informed decisions based on the actual changes in interest rates.

Conclusion

In summary, basis points are a unit of measurement used to express small changes in interest rates, yields, or other financial metrics. They are calculated by dividing the change in percentage points by 0.01. Basis points are essential in the mortgage industry as they provide a precise way to communicate changes in mortgage rates. By using basis points, lenders, borrowers, and financial institutions can compare rates accurately and make informed decisions.