If you’ve ever felt like mortgage rates sound like financial jargon, especially when someone drops terms like “25 basis points,” you’re not alone. For many borrowers, the term "basis point" might as well be a secret code.
Here’s the good news: this guide will decode it. Whether you're a first-time homebuyer or refinancing your third property, understanding how basis points impact your mortgage can save you thousands of dollars.
One basis point = 0.01%. It’s a small number with a big impact.
Key Takeaways:
- A basis point (bps) equals 0.01%. 100 bps = 1%.
- Basis points are commonly used to express mortgage rate changes.
- Even a 25-bps shift can mean significant cost differences over time.
- Understanding BPS helps borrowers compare offers more precisely.
- Always evaluate both rate and APR to get the full picture.
What Is a Basis Point (BPS)?
A basis point (often abbreviated as bps) is a unit of measure used in finance to describe the percentage change in interest rates or yields.
- 1 bps = 0.01%
- 100 bps = 1%
So if a lender says your mortgage rate improved by 25 basis points, it means your rate decreased by 0.25%, say, from 6.75% to 6.50%.
Why Do Mortgage Lenders Use Basis Points?
Mortgage professionals and loan officers use basis points because:
- It avoids confusion between 0.10% and 10%
- It gives a precise way to talk about small rate changes
- It aligns with how secondary markets and investors price loans.
Pro Tip: If you're comparing rate quotes from multiple lenders, a small change like 10 bps (0.10%) could mean hundreds or thousands in savings over the life of your loan.
Real-World Example: How 25 Basis Points Affect Your Mortgage?
Let’s say you’re borrowing $400,000 for a 30-year fixed mortgage.
| Interest Rate | Monthly Payment | Total Interest (Over 30 Years) |
|---|
| 7.00% | $2,661 | $558,024 |
| 6.75% | $2,595 | $534,168 |
A 25 bps difference = $66/month in savings, or nearly $24,000 over the loan term.
BPS in APR vs. Interest Rate: Why Both Matter?
Many borrowers confuse the interest rate with the APR (Annual Percentage Rate). Here’s the difference:
- Interest Rate is the cost to borrow the principal.
- APR includes fees, points, and other costs.
A loan with a slightly higher interest rate but lower fees might offer a better APR. Use basis points to compare both to ensure you're not overpaying.
When to Care About Basis Points?
- Rate Shopping: Comparing lenders’ quotes.
- Refinancing: Determining if rate drops justify closing costs.
- Rate Locks: Even small movements in market rates can shift pricing.
- Discount Points: Buying down your rate involves BPS math.
Resources That Help You Compare Mortgage Rates
Want transparency in the mortgage shopping process?
- Be My Neighbor – A trusted platform for comparing rates with licensed professionals (NMLS #1743790).
- realpha – A commission-free homebuying platform built for transparency and savings.
Both services aim to demystify the homebuying experience.
Conclusion: Why BPS Awareness Is a Borrower’s Superpower?
You don’t need to be a finance pro to master mortgage math. By understanding how basis points work and how they affect rates, fees, and long-term costs, you’re better equipped to shop smart, negotiate well, and save more.
Bottom line: Even a 0.10% shift in rates can be the difference between a good deal and a great one.
Platforms like realpha make homebuying easier, without the commissions that can drive up your costs. And with Be My Neighbor, you get expert advice from licensed pros.
FAQs About Basis Points in Mortgages
Are basis points only used for mortgage rates?
No, they’re used across finance, stocks, bonds, Treasury yields, but in mortgages, they help communicate precise rate changes.
Is a 10-bps difference worth negotiating over?
Absolutely. Even 0.10% can save you thousands, depending on your loan size and term.
How many basis points is one discount point?
One discount point = 100 bps, or 1% of the loan amount. This usually reduces your rate by about 25 bps.
Is APR or interest rate more important?
APR gives a fuller picture because it includes fees. Compare both using BPS as your guide.
Can I negotiate basis points with a lender?
Yes, especially on closing costs and discount points. Always ask for a detailed cost breakdown.
Required Compliance Disclosures
- This content is for informational purposes only and does not constitute financial advice.
- NMLS #1743790 (Be My Neighbor)
- realpha is a commission-free homebuying platform and is not a lender.
- Mortgage rates and APRs vary by market and borrower profile. Always consult with a licensed mortgage professional.
- Information presented is subject to change without notice.
- Rate and cost comparisons are hypothetical and for illustrative purposes only.
For help comparing your options, visit Be My Neighbor or check out realpha.
Ready to explore mortgage options without sales pressure?
- Check rates and compare offers with licensed pros at Be My Neighbor
- Browse commission-free properties with realpha
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