What are basis points?
Basis points are a common unit of measurement for interest rates. A basis point is equal to 1/100th of 1%, 0.01%, or .0001. This means that a 1% change is equal to 100 basis points, or 0.01% is equal to 1 basis point. They are used to denote the percentage change in a financial instrument. Although basis points are small, they can affect your interest rates and the costs to finance your home.
Are basis points important to lenders?
Why are basis points used?
Basis points are popular for larger investments, such as mortgages. This is because smaller increases or decreases in interest rates can represent larger dollar amounts. A small increase in basis points can represent a large change in your interest rate.
How are mortgage basis points used for consumers?
Once a borrower begins to compare mortgage rates and terms, it’s likely they will face basis points. A borrower talks to their loan officer and tells them that they want to lock in their rate. The loan officer advises the borrower that the lender will charge a certain amount of basis points for locking in your rate for that period. For example, if your lender charges 50 basis points, you will have to pay one-half of 1 percent of your mortgage loan for your lock period.
How does a hike in basis points affect a mortgage?
Mortgage payments are composed of interest and principle. When the interest rate goes up, the payment goes up. The payment going up can prevent you from qualifying for a loan. To qualify for a loan, you must be able to repay the loan. If the interest rate hike means that you won’t be able to repay the mortgage, it’s possible that you won’t be approved.