A basis point (bps) is a unit for expressing very small percentage changes. One basis point = 0.01% (0.0001 in decimal). Put another way, 100 basis points = 1.00% and 25 basis points = 0.25%.
Professionals use "bps" because it avoids ambiguity with decimal percentages. Saying "25 basis points" is clearer than "0.25%" or "a quarter percent" when trading, pricing loans, or negotiating fees where precision matters.
Lenders, mortgage brokers, commercial lenders, investors, asset managers and underwriters commonly use basis points to describe rate moves, loan spreads, fees, cap rate differences and yield changes.
Conversion is simple: multiply bps by 0.01% (or divide by 100). Examples: 25 bps = 25×0.01% = 0.25%. 50 bps = 0.50%. 100 bps = 1.00%.
To see dollar impact, convert bps to a percentage change in the annual rate and then recompute the loan payment or interest cost. Example: a 25-bps increase on a 30-year, $300,000 mortgage raises the annual rate by 0.25% — you must recalculate monthly payments to find the dollar effect.
Monthly payment formula (standard mortgage): M = P * r / (1 - (1+r)^-n) where P = loan principal, r = monthly interest rate (annual rate/12), n = total payments. To evaluate a bps move: 1) convert bps to annual decimal (bps×0.0001), 2) add/subtract from the annual rate, 3) compute r and M before and after; the difference is the monthly impact.
Real estate finance often involves tiny percentage differences that produce large dollar consequences over many years. Basis points remove ambiguity and make communication precise (for example, "15 bps" vs "0.15%" or "0.0015").
Loan spreads (lender margin over a benchmark), cap rates, bond yields and interest rate caps are routinely quoted in basis points so market participants can compare offers and risk premiums quickly.
Fees and commissions are also expressed in bps (for instance, a 100-bps origination fee). Investment performance is often shown in bps to highlight small but meaningful differences between funds or offerings.
Example: $300,000 loan, 30 years (360 months). Rate rises from 6.50% to 7.00% (50 bps = 0.50%).
At 6.50%: monthly r = 0.065/12 ≈ 0.0054167 → payment ≈ $1,897.
At 7.00%: monthly r = 0.07/12 ≈ 0.0058333 → payment ≈ $1,996.
Monthly increase ≈ $99–$100; annual increase ≈ $1,200. Over 30 years this can change total interest by tens of thousands of dollars.
Basis points measure rate/fee changes. "Points" are fees paid up-front (1 point = 1% of loan amount) to reduce rate; they’re not the same as basis points. APR includes fees and interest and can be compared using bps differences for clarity. Effective interest rate refers to the borrower’s true cost after fees — often expressed using APR and bps for small differences.
Lenders may quote origination fees, servicing fees or broker commissions as bps of loan amount or asset value (for example, 125 bps = 1.25% of loan balance).
Example: a 100-bps origination fee on a $300,000 loan = 100×0.01%×$300,000 = 1%×$300,000 = $3,000. For 35 bps: 0.35%×$300,000 = $1,050.
Discount points are prepaid interest (each point = 1% of loan amount) used to lower the interest rate. Basis-point fees are proportionate charges or margins expressed as hundredths of a percent. Points change the rate directly; bps typically describe the rate itself or proportional fees.
Sarah is buying a home and gets a rate quote of 6.10%. Her mortgage officer later tells her the rate may move by 40 bps (0.40%) before closing.
40 bps = 0.40%. If Sarah’s $350,000 loan goes from 6.10% → 6.50%:
At 6.10%: monthly r = 0.061/12; compute M using formula.
At 6.50%: monthly r = 0.065/12; compute new M. The difference is the monthly cost of the 40-bps move (for a $350k loan, expect roughly $80–$110 more per month depending on exact term).
Sarah compares the monthly increase and total interest impact against the cost of buying rate protection (lock or buy-down points). If the monthly/total cost of a rate increase outweighs the lock fee, she locks; if the lock fee is large and the projected rate move is small, she may float and negotiate bps-based fees instead.
Watch any bps-based changes to rates or fees in writing, ask lenders to translate bps into dollars for your loan amount, and compare that dollar impact to lock/buy-down costs.
Investors compare cap rates, yields and loan spreads in bps because a few bps can materially change projected return or risk-adjusted performance, especially at scale.
If two MBS coupons differ by 25 bps (0.25%), the annual income difference on a $10M exposure is $25,000 — meaningful for institutional investors. Spread differences also affect price, duration and hedging costs.
A small spread improvement (e.g., 10–30 bps) can turn a marginal deal into an acceptable one when debt service coverage, cash-on-cash return and IRR are tight. Always convert bps to dollar and percentage effects for the specific deal size.
Get fee quotes both as bps and as dollar amounts on your loan size so you can compare offers apples-to-apples. Request a written breakdown in the Loan Estimate or term sheet.
Decide whether to lock based on the likely bps swing and the cost of locking. A float-down option lets you benefit if rates improve but may cost bps-based fees — always compare potential savings in dollars.
Use bps to compare APRs, lender spreads and fee schedules. Convert everything to dollars for your loan amount, then compare total cost and effective rate (APR) to choose the best offer.
Use a mortgage calculator that allows you to enter loan amount, current APR, new APR (after bps change), term and fees. Input bps as an annual rate change (bps×0.0001) or enter the final APR directly.
Keep a quick reference: 1 bps = 0.01%; 10 bps = 0.10%; 25 bps = 0.25%; 50 bps = 0.50%; 100 bps = 1.00%. For monthly rate change divide the annual change by 12 (e.g., 25 bps annual = 0.25%/12 ≈ 0.0208% monthly).
Do not confuse discount points (each = 1% of loan amount) with basis points (0.01%). Points are fees you pay up-front to lower the rate; bps measure small percentage changes in rates or fees.
Some lenders express fees only in bps; failing to convert them to dollars for your loan size can hide the true cost. Always ask for the dollar equivalent.
Reading a 25-bps spread without converting it to the loan amount and term can lead to underestimating the financial effect — always run the math.
Yes. 100 basis points = 1.00%.
Quoting in bps standardizes fees as a percentage of the loan or asset, making the fee proportional to deal size and easier to compare across lenders and transactions.
Typical origination fees vary but commonly range from 100–200 bps (1.00%–2.00%) of the loan amount for residential loans; commercial loans and specialty products can be higher or structured differently.
Ask for the bps number and its dollar equivalent on your loan amount, how the bps affects APR and monthly payment, and whether any lock or float-down fees are charged in bps or dollars. Get the answers in writing so you can compare offers accurately.
