What Is a Basis Point?

A basis point, also known as a bps, is a unit of measurement lenders use to communicate mortgage rate changes. Even small basis point changes can impact monthly mortgage payments and total interest paid over the life of the loan. Buying a home means you may be dealing with dozens of unfamiliar real estate and financial terms. And while you can rely on your agent and lender to be your expert guides, familiarity with basis points can help you better plan for your monthly mortgage payments.

How much is one basis point?

One basis point equals a percentage of a percent (1/100th of a percentage point), or 0.01%. A change of 100 basis points equals 1%. This means that if a lender raises your interest rate from 4% to 4.25%, your interest rate rose by 25 basis points. Another way to look at it? Your interest rate went up 0.25%.

How do you calculate a basis point?

Calculating basis points is straightforward. To convert basis points into percentages, divide the basis point number by 100. For example, if a lender offers an interest rate 150 basis points less than your current rate, you would divide 150 by 100 to get 1.5%. 

To convert percentages into basis points, multiply the percentage number by 100. So, if you wanted to convert 3.2% into basis points, you’d simply multiply 3.2 by 100 to get 320 basis points. 

Let’s assume you have a mortgage with a variable interest rate of 6.5%, and interest rates rise by 50 basis points. To calculate the rate increase based on the number of basis points, you’d need to divide 50 by 100, and then add that percentage to your baseline interest rate of 6.5%. Here's the math.

In this example, if you had an interest rate of 6.5% that rose 50 basis points, you’d have a new interest rate of 7%. 

In the table below, you can see how basis points translate into percentages.

How do basis points work?

Basis points are used to denote the change from one interest rate to another and impact mortgages in different ways. When you get a mortgage, the market often influences the initial interest rate you receive in your Loan Estimate. You can lock-in the rate you receive for 30 to 60 days to guarantee your rate won’t change from the time you make an offer until the day you close. If you choose not to lock-in, your rate could change at any time. The rate of change will be shown in basis points.

If you get a fixed-rate mortgage, the rate shown in your final Closing Disclosure is the rate you’ll have for the entire duration of your loan — unless you refinance. This means your monthly mortgage payments will remain the same.

If you get an ARM (adjustable-rate mortgage) or variable-interest rate mortgage, you’ll have a set rate locked in for an introductory period that adjusts at a predefined time in the future. Your monthly mortgage payments might change when the initial fixed rate period ends or when there’s a scheduled rate adjustment. Initial fixed rate periods typically last 5-7 years, and rate adjustments are made on the anniversary of the loan after the initial fixed rate period is over. 

How basis point changes affect mortgages

Let’s assume you take out an adjustable-rate mortgage of $400,000 at a 5% fixed interest rate for 7 years. In year 8, your interest rate changes by 300 basis points. This would represent a 3% change in your baseline interest rate, resulting in a new interest rate of 8%. Consider how this would impact your monthly mortgage payments using Zillow’s Refinance Calculator.

In this case, 300 basis points represent a $788 difference in monthly mortgage payments. Borrowers who anticipate greater income in the future might be able to afford the new monthly mortgage payments. 

However, if you expect your income to remain relatively stable throughout your loan term, this could be a significant change. Be sure to consider these potential changes when taking out an ARM or other variable interest rate loan. You can speak with one of our loan officers at Zillow Home Loans to learn more about different mortgage loan options and the rates you may qualify for.

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