What Are Basis Points?
A basis point (abbreviated as bp or bps) is one-hundredth of one percentage point (0.01%). 100 basis points = 1%. The term is used in real estate finance to express small changes in interest rates, cap rates, yields, and other rates where precision matters. Saying "rates increased by 50 basis points" is clearer than "rates increased by half a percent" because it eliminates ambiguity.
Why basis points matter
In real estate, small rate differences have large dollar impacts. A 25 basis point (0.25%) increase on a $500,000 mortgage increases the monthly payment by approximately $75 and the total interest over 30 years by approximately $27,000. For investment properties, a 50 basis point cap rate difference can change a property's value by hundreds of thousands of dollars.
Common uses
Interest rates: "The Fed raised rates by 25 bps" means rates increased by 0.25%.
Loan pricing: Origination fees and discount points are sometimes expressed in basis points. "200 bps origination" = 2% of the loan amount.
Cap rates: "Cap rates compressed by 75 bps" means the average cap rate decreased by 0.75%, implying property values increased.
Yield spreads: The difference between two yields is expressed in basis points to be precise.
For investors
Understanding basis points helps you evaluate financing options, compare returns, and communicate precisely with lenders and partners. When a lender offers "prime plus 200 bps," you know that means prime rate + 2%. When a broker says "cap rates in the submarket are 75 bps above the metro average," they mean 0.75% higher.