What's the definition of basis points or BPs?

Mortgage basis points (also known as BPs, and pronounced as "bips") are a unit of measurement used in finance to describe the percentage change in the value or rate of financial tools, like interest rates. One basis point is equal to 0.01% or 0.0001 in decimal form. Basis points are crucial because they provide a common metric for financial professionals to discuss minor yet significant shifts in interest rates with financial consumers.

What are basis points used for in mortgages?

Basis points are used to track changes in interest rates, which can be used to predict changes in the amount of future adjustable-rate mortgage (ARM) mortgage payments. For instance, let’s say you have an ARM initially set at 3.75% that rose 25 basis points. Your new interest rate would be 4.00%, and you can anticipate an increase in your mortgage payment.

Using basis points makes it easier to calculate the impact of small changes in interest rates — sometimes as small as a fraction of a percent — which can represent thousands of dollars over the life of a loan. Additionally, they help remove any ambiguity when referring to the specifics of an interest rate.

Converting between percentages and basis points

If you want to convert basis points into a percentage change, divide your basis points by 100. BPS / 100 = %.

Conversely, if you want to convert a percentage into basis points, multiply your percentage by 100. (%)(100) = BPS.