What is a Basis Point?
A basis point (abbreviated as bp or bps, pronounced "bips") is a unit of measurement equal to one hundredth of one percent (0.01%). In financial terms, 100 basis points equals 1%. Basis points are used throughout real estate finance to express small changes in interest rates, cap rates, yields, and other percentages where precision matters.
The reason basis points exist is to avoid confusion when discussing percentage changes in rates that are themselves expressed as percentages. If a mortgage rate moves from 6.50% to 6.75%, saying it "increased by 0.25%" is ambiguous -- does that mean 0.25 percentage points or 0.25% of 6.50% (which would be 0.016%)? Saying the rate "increased by 25 basis points" is unambiguous and precise.
Common basis point conversions
| Basis points | Percentage | Example |
|---|---|---|
| 1 bp | 0.01% | Rate: 6.50% to 6.51% |
| 25 bps | 0.25% | Typical Fed rate move increment |
| 50 bps | 0.50% | Significant rate change |
| 100 bps | 1.00% | Major rate move |
| 200 bps | 2.00% | The 2022 mortgage rate surge was ~400 bps |
Basis points in real estate investing
Mortgage rates: Lenders and market commentators discuss rate changes in basis points. "Rates dropped 15 basis points this week" means the average rate declined from, say, 6.80% to 6.65%. For a $300,000 mortgage, 25 basis points translates to roughly $50/month in payment difference.
Cap rates: Commercial real estate professionals express cap rate changes in basis points. "Cap rates have compressed 75 basis points" means cap rates have declined from, say, 7.00% to 6.25%. This compression directly affects property values -- lower cap rates mean higher values.
Loan pricing: Hard money lenders often quote their rates and fees in basis points. A lender charging "200 basis points above prime" means their rate is the prime rate plus 2.00%. Origination fees quoted as "200 bps" means 2% of the loan amount.
Spread: The difference between two rates is called the spread, often expressed in basis points. The spread between the 10-year Treasury yield and the average mortgage rate is typically 170-200 bps. When this spread widens (becomes larger), it often signals stress in the mortgage market or lender risk aversion.
Why small changes matter
In real estate, basis point changes that sound small can have large dollar impacts at scale. On a $10 million commercial property valued at a 6.00% cap rate, a 25 basis point compression to 5.75% increases the property value by approximately $430,000. On a $500,000 mortgage, 50 basis points in rate difference translates to roughly $150/month or $54,000 over the life of a 30-year loan.
This is why sophisticated investors and analysts speak in basis points rather than vague terms like "rates went up a little." Precision in financial analysis translates directly to precision in investment decisions.