Definition
A basis point (abbreviated as "bps" and pronounced "bips") is a unit of measurement equal to 1/100th of a percentage point, or 0.01%. Financial professionals use basis points to describe small changes in interest rates, yields, and other financial percentages because it eliminates confusion when discussing fractional percentage changes.
For example, if your loan's interest rate increases from 7.25% to 7.50%, that's a 25 basis point increase (0.25% ÷ 0.01% = 25 bps). This system makes it much clearer than saying "a quarter percent" or "25 hundredths of a percent." Basis points are especially useful when discussing Federal Reserve rate changes, which typically move in increments of 25 basis points (0.25%).
Understanding basis points helps you better interpret financial news and loan documents. When you hear that "the Fed raised rates by 75 basis points," you'll know that means a 0.75% increase, which will likely affect your variable-rate loans like HELOCs or adjustable-rate mortgages.
How It Applies to HELOCs
Basis points are particularly important for HELOC borrowers because most HELOCs have variable interest rates that fluctuate with market conditions. Your HELOC rate is typically calculated as the prime rate plus a margin. When the Federal Reserve changes the federal funds rate, it usually moves in 25, 50, or 75 basis point increments, which directly impacts the prime rate and therefore your HELOC rate.
For example, if your HELOC is priced at "Prime + 50 basis points" and the prime rate is 8.50%, your rate would be 9.00%. If the Fed raises rates by 25 basis points, the prime rate would likely increase to 8.75%, making your new HELOC rate 9.25%. Understanding basis points helps you anticipate how Fed decisions will affect your monthly payments during both the draw period and repayment period of your HELOC.
How It Applies to DSCR Loans
For real estate investors using DSCR loans, basis points matter because these loans often have adjustable rates or rate adjustment periods. DSCR loan pricing is typically expressed as a spread over an index (like the 10-year Treasury or SOFR) measured in basis points. A lender might quote "10-Year Treasury + 275 basis points" for a DSCR loan.
Basis points also help investors evaluate rate lock options and compare loan offers. If one lender offers a DSCR loan at 8.25% and another at 8.50%, that 25 basis point difference could significantly impact your debt service coverage ratio and cash flow. On a $500,000 investment property loan, a 25 basis point difference equals about $104 per month in payment difference, which directly affects your property's profitability and ability to meet the minimum DSCR requirements (typically 1.20 to 1.25).
Example Calculation
Let's say you're considering a $400,000 HELOC when the prime rate is 8.50%, and your lender offers "Prime + 75 basis points":
Step 1: Convert basis points to percentage 75 basis points = 75 × 0.01% = 0.75%
Step 2: Calculate your HELOC rate HELOC Rate = Prime Rate + Margin HELOC Rate = 8.50% + 0.75% = 9.25%
Step 3: Calculate the impact of a Fed rate change If the Fed raises rates by 50 basis points:
- New prime rate = 8.50% + 0.50% = 9.00%
- New HELOC rate = 9.00% + 0.75% = 9.75%
Step 4: Calculate payment impact (interest-only on $100,000 drawn)
- Original monthly payment = ($100,000 × 9.25%) ÷ 12 = $770.83
- New monthly payment = ($100,000 × 9.75%) ÷ 12 = $812.50
- Monthly increase = $41.67 due to 50 basis point Fed increase
Explore More Financial Terms
Build your financial literacy with our complete glossary of HELOC, mortgage, and investing terms.
Browse All Terms→