Lenders use basis points (BPS)—where 1 BPS equals 0.01%—to fine-tune mortgage pricing based on market trends, credit risk, and profit margins. why mortgage lenders use basis points Even a small change, like 25 BPS, can significantly impact monthly payments. Mortgage lenders rely on BPS to adjust rates in response to shifts in bond yields, borrower profiles, and daily market data, making it crucial for buyers to understand how these small units affect long-term costs.
What Are Basis Points, and Why Do They Matter?
Let’s start with the basics:
- One basis point = 0.01%
- So, 100 basis points = 1%
This tiny-sounding unit packs a punch when applied to a mortgage. A 25 basis point (BPS) increase can change your monthly payment more than you might think.
Example:
On a $400,000 loan:
- At 6.00% interest: ~$2,398/month
- At 6.25% interest (25 BPS increase): ~$2,462/month
↺ Difference: ~$64/month or $768/year
Why it matters: Lenders use BPS to fine-tune pricing based on daily market conditions, credit risk, and other borrower-specific factors.
How Do Lenders Actually Price a Loan?
Loan pricing is not pulled out of thin air—it’s a structured process based on several layers of cost and risk.
Key Components of Loan Pricing:
- Cost of Funds (Base Rate)
- Driven by bond markets, especially mortgage-backed securities (MBS)
- When MBS yields go up, mortgage rates often follow
- Credit Risk Adjustments
- Credit score, loan-to-value (LTV) ratio, and debt-to-income (DTI) affect pricing
- Riskier borrowers = higher rate
- Loan-Level Price Adjustments (LLPAs)
- Fannie Mae and Freddie Mac charge these
- LLPAs are typically reflected as basis point adjustments
- Profit Margin
- Lenders bake in a margin for operating costs, servicing, and profit
- Discount or Rebate Points
- Borrowers can pay discount points (1 point = 100 BPS = 1% of loan amount) to lower their rate
- Alternatively, they can receive rebate points for accepting a higher rate
How Do Rate Changes Happen Daily?
Mortgage rates can shift daily — or even multiple times per day — due to:
- Economic reports (like jobs data or inflation)
- Federal Reserve announcements (though the Fed doesn’t set mortgage rates directly)
- Changes in MBS trading prices
- Global events that trigger bond market movement
Example:
If the 10-year Treasury yield rises by 20 BPS, lenders may increase mortgage rates by 10–15 BPS shortly after.
Comparing Loans: Why Small BPS Changes Can Have a Big Impact
When comparing mortgage quotes, small differences matter.
Let’s say you get two quotes on a $300,000 loan:
Lender |
Rate |
Monthly Payment |
Total Interest (30 years) |
| A | 6.00% | $1,798 | $347,515 |
| B | 6.125% (12.5 BPS more) | $1,822 | $356,106 |
That’s a $24/month difference—but over 30 years, you’d pay $8,591 more in interest.
How You Can Influence Your Loan Pricing
Lenders may set the stage, but you still have control. Here’s how to improve your loan pricing:
1. Boost Your Credit Score
- Pay off debt, avoid late payments, and limit credit inquiries
2. Lower Your Loan-to-Value Ratio (LTV)
- Bigger down payment = less risk for lender = better rate
3. Choose a Shorter Loan Term
- 15-year mortgages often come with lower rates
4. Consider Buying Discount Points
- Paying 1 point (100 BPS) upfront can reduce your interest rate by ~0.25%
5. Lock at the Right Time
- Watch market trends; some lenders allow a float-down option if rates improve
FAQs:
What does 50 BPS mean in mortgage terms?
50 BPS = 0.50%. A lender may increase your rate from 6.00% to 6.50% due to changes in the market or credit risk.
Can I negotiate loan pricing?
Yes! You can negotiate lender fees, consider discount points, and shop around for better offers.
How often do lenders change their rates?
Some adjust daily based on market conditions, while others might update multiple times a day in volatile markets.
Are basis points only used in mortgages?
No—BPS are common in other financial areas too, like bond yields and bank fees, but are especially important in loan pricing.
Final Thoughts
Whether you’re applying for your first mortgage or refinancing a rental property, understanding how lenders price loans gives you power. Every basis point counts — and small improvements in your credit or timing can mean thousands saved.