What Is A Basis Point?

A basis point is a unit of measure in finance. One basis point equals 0.01%, or one-hundredth of a percent.

A Longer Definition: Basis Point

The basis point is an essential unit of measurement in finance, particularly in areas involving interest rates and investment returns, such as mortgages. Basis point measurement allows for a precise, standardized way to discuss changes in financial percentages.

Precision is critical because even small changes in interest rates have significant implications.

One basis point equals 0.01% or one-hundredth of one percent. 100 basis points, therefore, equal 1 percentage point. The term “basis point” helps avoid the confusion that can arise from saying “percent” or “percentage points.”

In real estate, mortgage professionals reference basis points when discussing changes in current mortgage rates. For instance, if mortgage rates drop from 6.25% to 6.00%, calling it a “25 basis point change” communicates the change in interest rates without ambiguity.

Basis Points: A Real-World Example

Imagine the average mortgage rate for a 30-year fixed-rate mortgage is currently 6.00 percent. Then, in a surprise announcement, the Federal Reserve says that inflation rates are expected to slow over the next 12 months, which triggers a surge in demand for mortgage-backed securities. As a result, mortgage rates drop 50 basis points overnight, lowering current 30-year fixed-rate mortgage rates to 5.50 percent.

For a first-time home buyer, this rate reduction is more than just a small percentage change; it’s a door to increased purchasing power. After the 50 basis point reduction, the home buyer can afford a more expensive home for the same monthly payment – potentially up to six percent more. This could mean moving to a larger house or adding desirable features they might not have afforded before.

Frequently Asked Questions About Basis Points

How much is 1 basis point?

One basis point equals 0.01% or one-hundredth of a percentage point.

How much is 100 basis points?

100 basis points equals 1.00% or one percentage point.

Why do mortgage professionals use basis points?

Mortgage lenders use basis points to describe changes in interest rates because it’s unambiguous, and faster to say than “percentage points.”

Is the term “basis point” used in mortgage only?

The term “basis point” is used in most financial industries including mortgage, commercial real estate, investing, and lending.