Basis Point
A basis point is one-hundredth of one percent (0.01%). Mortgage professionals use basis points to describe small changes in interest rates. For example, if your rate drops 25 basis points, it falls by 0.25% — from 7.00% to 6.75%.
The term exists to avoid confusion when discussing small rate movements. Saying 'rates moved 50 basis points' is clearer than 'rates moved half a percent' in professional contexts where precision matters.
On a $400,000 mortgage, a 25 basis point rate reduction (0.25%) lowers your monthly payment by approximately $65 and saves around $23,400 in total interest over 30 years. A 100 basis point move (1.00%) changes the monthly payment by about $260 on the same loan.
You'll hear basis points frequently when the Federal Reserve adjusts the federal funds rate (e.g., 'the Fed hiked 75 basis points'). Mortgage rates don't move in lockstep with Fed rate changes, but Fed policy significantly influences the direction of mortgage rates over time.
Key Takeaway
A basis point is one-hundredth of one percent (0.01%). Mortgage professionals use basis points to describe small changes in interest rates. For example, if your rate drops 25 basis points, it falls by 0.25% — from 7.00% to 6.75%.
Related Terms
Frequently Asked Questions
There are 100 basis points in 1%. So 50 basis points equals 0.50%, and 25 basis points equals 0.25%.
Basis points provide precision and avoid ambiguity. If a rate goes from 7% to 7.5%, saying it rose '50 basis points' is clearer than '0.5 percentage points.'
On a $400,000 30-year loan, 1 basis point (0.01%) changes the monthly payment by roughly $2.60.
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