What are Basis Points?
Basis points, often abbreviated as “bp,” bps,” or “bips,” are a standard unit of measure to describe interest rates and other percentages in finance. A basis point is a fraction of a percent and is the smallest unit of measurement used in finance. One basis point equals 1/100th of 1%, which is also expressed as 0.01% or 0.0001. One hundred basis points equals one percent (1%).
Basis points are used for calculating changes in interest rates, equity indices, and the yield of a fixed-income security. When the Federal Reserve Board changes the federal funds (fed funds) target interest rate, it is usually expressed in basis points. If the Federal Reserve Board is said to have “raised the rate by 75 basis points,” it means the rate was increased by 0.75% or three-quarters of a percent.
Why are basis points important to my mortgage?
When the Federal Reserve Board increases the fed funds rate other rates, such as the prime rate, generally increase. This usually leads to an increase in rates that use the fed funds rate or the prime rate as the underlying index rate, such as the interest rates charged on credit cards and mortgages.
If you have a variable rate mortgage or an adjustable rate mortgage, your interest rate could change depending upon market rates. A change in the interest rate of your mortgage affects the amount of your monthly payment and the total amount of interest you pay on your loan. The change of even one basis point can mean hundreds or even thousands of dollars over time.
The frequency of the rate adjustment and the specific index the mortgage is tied to are specified in your mortgage agreement. Paying attention to rate changes by the Federal Reserve Board can help you to anticipate rate changes for your variable rate or adjustable rate mortgage.
For information about mortgage programs offered by Enterprise Bank, visit https://www.enterprisebanking.com/personal/loans/mortgage or contact The Mortgage Center at Enterprise Bank at 877-671-2265.