Century 21 – Blackwell & Co.

Basis Points Explained- Terms Used During Homebuying Process

August 30, 2023

Basis points, often abbreviated as “bps,” are a unit of measurement commonly used in finance to express small changes in interest rates, yields, or percentages. One basis point is equal to one one-hundredth of a percentage point, or 0.01%. While it might seem minuscule, basis points are crucial in financial contexts where even tiny fluctuations can have significant impacts. They provide a standardized way to discuss and compare changes in interest rates and other financial metrics.

In the context of the homebuying process for real estate, basis points are often used to discuss changes in mortgage interest rates. When a potential homebuyer applies for a mortgage loan to purchase a house, the lender offers an interest rate at which the borrower will repay the loan over its term. These interest rates can be expressed in terms of percentage points or basis points.

For example, let’s say a lender offers a homebuyer an interest rate of 4.25% for their mortgage. If there’s a subsequent discussion about a potential rate change, it might be stated that the rate could increase by 25 basis points. This means that the new rate would be 4.50% (4.25% + 0.25% = 4.50%).

Basis points are particularly useful in the real estate industry due to the significant impact even small changes in interest rates can have on mortgage payments. When interest rates rise, mortgage payments also increase, potentially affecting a borrower’s affordability and purchasing power. Conversely, when rates decrease, borrowers might find it more financially feasible to buy a home or refinance an existing mortgage.

In summary, basis points are a standardized measurement that allows for precise discussions of changes in interest rates and other financial metrics. In the homebuying process, they are particularly relevant when discussing mortgage interest rate changes, which can have substantial implications for a borrower’s financial situation and ability to purchase or refinance real estate.