What Are Basis Points?
In real estate financing, commercial lending, and bond markets, discussing interest rates in mere percentages can be too broad, as millions of dollars can hinge on a fraction of a percent. A basis point (bps, pronounced "bips") solves this by providing a hyper-precise unit of measurement.
There are 100 basis points in 1%. Therefore:
- 1 basis point = 0.01%
- 50 basis points = 0.50%
- 100 basis points = 1.00%
If a mortgage interest rate drops from 7.50% to 7.25%, a lender will say the rate "dropped by 25 basis points."
Why Use Basis Points?
The primary reason financial professionals use basis points instead of percentages is to eliminate ambiguity in conversation. If a banker says, "Our 5% interest rate just went up by 1%," it is unclear if they mean the rate is now 6% (adding 1.00%) or if the rate is now 5.05% (a 1% mathematical increase of the 5% rate).
However, if the banker says, "The rate went up by 100 basis points," it is universally understood that the new rate is exactly 6.00%.
Basis Points in Real Estate Transactions
In Florida real estate, you will frequently encounter basis points when dealing with:
- Mortgage Rates — When locking in a loan rate with a mortgage broker, rate fluctuations are tracked in basis points.
- Loan Origination Fees — A lender might charge an origination fee of 50 basis points on a $1,000,000 commercial loan, which equates to a $5,000 fee due at closing.
- Cap Rates — Real estate investors evaluating the profitability of an apartment complex or commercial plaza will track shifts in the Capitalization Rate (Cap Rate) using basis points. A shift from a 6.00% cap rate to a 6.50% cap rate (a 50 bps increase) drastically changes the valuation of the property.
Related Terms
- Mortgage — Where basis points are most commonly seen
- Amortization — The schedule affected by basis point shifts in the interest rate
- Commercial Lease — Investors analyze cap rates (measured in bps) based on rental income
Barnes Walker Commercial Transactions
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Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC