What Are Basis Points?

What Are Basis Points?

Basis points, sometimes abbreviated as BPS, BP, or BIPS, refers to a financial unit of measure for percentages like interest rates. One basis point equals 0.01%, or one one hundredth of a percent. Represented in decimals, one point equals 0.0001. 

People use basis points to show how a financial instrument has changed in value or rate. One basis point is equal to a .01% change, and 100 basis points equals a 1% change. But why are they called basis points? Great question! The term basis comes from the term “base move,” which is the difference, or spread, between two percentages.

It can be easier to compare basis points than the minutiae of looking at different perfectages, so people often use basis points for thinks like security yields, changes in interest rates, and so on. Additionally, a basis point is a fixed number, and not a ratio, so many people find them easier to understand.

Basis Points and Your Mortgage

Basis points can affect your mortgage if you have an ARM or adjustable rate mortgage. As the name implies, with an adjustable rate mortgage, the interest rate can change over time. The change in your interest rate can be represented in basis points.

For example, let’s say you are buying a $500,000 home with a standard 30-year adjustable rate mortgage and a 5% interest rate. Over the life of your loan, you will pay $25,000 in interest. Now, let’s say that your basis points jump 25 basis points. This increases your rate to 5.25%, which means you will pay $26,250 over the life of your loan.

Basis points are a way of representing percentages in whole numbers. This term is used in many financial sectors, including real estate, to show how percentages, rates, or value changes over time.