Introduction
If you are looking to purchase a home, then you may be familiar with the term “BPS” or basis points. But what exactly are BPS in mortgage? In simple terms, a basis point is a unit of measurement used in finance to describe changes in interest rates or yields. In the mortgage industry, basis points are used to calculate the interest rate on a mortgage loan.
Understanding Basis Points
A basis point is equal to 1/100th of a percent or 0.01%. For example, if the interest rate on a mortgage loan is 4.5%, then one basis point would be equal to 0.045%. Similarly, if the interest rate on a mortgage loan is 5%, then one basis point would be equal to 0.05%.
Calculating Mortgage Interest Rates
When you apply for a mortgage loan, the lender will calculate the interest rate based on several factors, including your credit score, income, and the current market conditions. The interest rate on a mortgage loan is typically expressed in terms of basis points.
Example:
If the interest rate on a mortgage loan is 4.5%, then it can be expressed as 450 basis points (4.5% x 100 = 450).
The Role of Basis Points in Mortgage Loans
Basis points play a crucial role in determining the interest rate on a mortgage loan. Even a small change in basis points can have a significant impact on the total interest paid over the life of the loan.
Example:
Let’s say you are applying for a mortgage loan of $300,000 with an interest rate of 4.5%. If the interest rate increases by 25 basis points, then the interest rate would be 4.75%, and you would end up paying an additional $11,314 in interest over the life of the loan.
Basis Points and Mortgage Points
It is important not to confuse basis points with mortgage points. Mortgage points are fees paid to the lender at closing in exchange for a lower interest rate on the mortgage loan. Each point is equal to 1% of the loan amount. For example, if you are taking out a mortgage loan of $300,000 and pay one point, then you would pay $3,000 in fees.
Conclusion
In summary, basis points are units of measurement used in finance to describe changes in interest rates or yields. In the mortgage industry, basis points are used to calculate the interest rate on a mortgage loan. Understanding how basis points work can help you make informed decisions when applying for a mortgage loan.
