Basis Points in Mortgages: Decoding Financial Jargon
Understanding financial jargon can be confusing, but this article can help. Get an explanation of basis points in mortgages and how they relate to your home loan decisions. Learn the basics today!
What Are Basis Points in Mortgages?
When shopping for a mortgage, it's important to understand the financial nuances of your loan options. One of the key terminologies used to measure mortgage rates is “basis points”. But what are basis points?
Basis points (abbreviated bps or BPS) are a unit of measure used in financial circles to represent the percentage change in the value or rate of a financial instrument. In the context of mortgages, basis points are important because they allow lenders to accurately calculate and compare mortgage rate differences, even if those differences are minor.
Understanding Basis Points in Mortgages
Essentially, a basis point is a unit of measure equal to one hundredth of one percent (0.01%). For example, a mortgage rate at 3.5% is 350 basis points or 3.5% x 100. Conversely, 1 basis point is equal to 0.01% or 0.0001.
When discussing mortgage rates, lenders typically reference basis points to indicate small changes in rates. For example, if the current mortgage rate is 4.00%, a rise of 6 basis points would bring the rate up to 4.06%. On the other hand, if the current rate is 4.00%, a decrease of 10 basis points would lower the rate to 3.90%.
Why Are Basis Points Important?
Basis points are important for lenders and borrowers because they make it easier for them to calculate smaller changes in mortgage rates with precision. For example, if a mortgage rate changes from 4.04% to 4.05%, the difference between the two rates would be only 1 basis point. Without basis points, it would be impossible for lenders to accurately determine this difference.
In addition, basis points help mortgage borrowers better understand and compare different mortgage deals. For instance, if one lender offers a loan at 4.07%, and another offers a loan at 4.02%, it would be easier to understand that the difference in rates is 5 basis points.
Bottom Line
Basis points are an important measure used in the mortgage industry to more accurately and effectively compare mortgage loan options. Understanding the financial nuances like basis points can help you make an informed decision when shopping for a mortgage.