Basis Point

A basis point (bp) is a unit of measurement equal to one one-hundredth of a percentage point (0.01%). In the secondary mortgage note market, basis points provide a precise, unambiguous way to express differences in interest rates, yields, servicing fee strips, and pricing spreads. Saying a note's interest rate increased by 50 basis points (written as 50 bps) is clearer than saying it went up "half a percent," which could be misinterpreted as half of the existing rate rather than an absolute 0.50% increase. This precision matters when small rate differences translate to thousands of dollars over the life of a loan.

Basis Point Conversion Reference

The relationship between basis points and percentages is straightforward, but having a quick reference eliminates mental math during pricing discussions:

To convert basis points to a percentage, divide by 100. To convert a percentage to basis points, multiply by 100. A rate change from 5.75% to 6.25% is a move of 50 basis points.

Where Note Investors Encounter Basis Points

Basis points appear throughout the note investing workflow, from initial screening through disposition:

• Interest rate spreads — When comparing a note's coupon rate to the investor's target yield, the difference is expressed in basis points. A note with a 7.00% coupon purchased to yield 12.00% has a 500-basis-point spread between coupon and yield. That spread reflects the discount the investor pays and the risk premium embedded in the price.
• Servicing fees — Loan servicers often quote their fee as a basis-point strip on the outstanding balance. A servicing fee of 25 bps on a $100,000 UPB translates to $250 per year, or roughly $20.83 per month. Larger institutional servicers may charge 12.5 to 50 bps depending on loan type and volume, while specialty servicers handling non-performing loans typically charge flat monthly fees instead.
• Pricing adjustments — Sellers and brokers describe pricing in basis points relative to UPB or a benchmark. A tape of performing loans might trade at "par minus 200 bps" (98% of UPB) or "plus 50 bps" (100.5% of UPB). These shorthand descriptions let buyers and sellers communicate quickly during negotiations.
• Rate modifications — When structuring a loan modification for a delinquent borrower, the investor decides how much to reduce the interest rate. Dropping from 8.00% to 5.00% is a 300-basis-point reduction. Quantifying the change in basis points makes it easy to model the impact on monthly payments and total interest over the remaining term.

The Dollar Impact of Basis Points

Small-sounding basis-point differences can have a large financial impact, especially on higher-balance loans or longer terms. Consider the effect of a 25-basis-point rate difference on a $150,000 loan over 30 years:

A 25 bps increase adds nearly $8,700 in total interest over the life of the loan and roughly $24 per month. For note investors buying at a discount, these differences affect cash-on-cash return, yield to maturity, and net present value calculations. When evaluating a pool of 20 or 50 loans, basis-point-level precision in rate assumptions compounds into material differences in projected portfolio returns.

Basis Points in Market Context

In broader capital markets, basis points are the standard language for discussing Federal Reserve rate decisions, Treasury yields, and mortgage-backed securities pricing. When the Fed raises its benchmark rate by 25 basis points, that ripples through the fixed-income market and eventually affects the rates on mortgage notes trading in the secondary market. Note investors who follow macroeconomic conditions use basis-point movements in benchmark rates to anticipate shifts in note pricing, discount rates, and borrower refinance behavior. A 100-basis-point rise in prevailing rates, for example, reduces the likelihood that performing borrowers will prepay, which extends the investor's expected hold period and influences how much they are willing to bid.