how rates work

Basis Points

QUICK SUMMARY

A basis point is one one-hundredth of one percent. One hundred basis points equal one percent. The phrase exists so people can talk about small moves without saying "a hundredth of a percent" every time. HUD uses it for mortgage insurance. Traders use it for bonds. It is not a fee by itself.

A basis point is one hundredth of one percent. So 100 basis points equals 1 percent, 50 basis points equals one half of one percent, and 25 basis points equals one quarter of one percent. In mortgages, basis points are used to describe three different things: a change in an interest rate or market yield, a fee or price stated as a share of the loan amount, and insurance premiums such as FHA's. The number is the same unit in all three. The context tells you which one someone means.

Quick conversions

1 basis point = 0.01 percent.
10 basis points = 0.10 percent.
25 basis points = 0.25 percent.
100 basis points = 1 percent.
175 basis points = 1.75 percent.

Three ways the term is used

Rates and yields

When the news says a Treasury yield moved 10 basis points, it means the yield changed by one tenth of one percent. The U.S. Treasury publishes daily yields (Treasury). Mortgage pricing often moves with bond markets, but this article does not convert a Treasury move into a mortgage rate move. That relationship is not fixed. See what moves mortgage rates.

Fees and pricing

On a rate sheet or a lock confirmation, a price change of 25 basis points usually means a cost or credit equal to one quarter of one percent of the loan amount, not a change in the note rate. One discount point equals 1 percent of the loan amount, or 100 basis points of price (CFPB). See discount points and lender credits.

FHA premiums

HUD states FHA premiums in basis points. The upfront premium is 175 basis points, or 1.75 percent, of the base loan amount on most FHA loans. Annual MIP is stated the same way, for example 55 basis points, or 0.55 percent per year, for many 30-year loans above 95 percent loan-to-value with a base loan at or under the chart's threshold (ML 2023-05; HUD 4000.1 Appendix 1.0). Those are insurance premiums, not interest. See FHA MIP.

How to tell which one is meant

If it is about a market or a rate change, it is usually a yield or rate.
If it is on a lock confirmation or about points or credits, it is usually price as a share of the loan amount.
If it is about FHA insurance, it is a premium.
If you are not sure, ask: "Do you mean the note rate, or a cost on the loan amount?"

Fictional example

Fictional example: a lock desk says a borrower's price worsened by a number of basis points after the loan-to-value changed. A borrower hears that the rate jumped. In fact, the same note rate now costs a bit more in points, a share of the loan amount. The new lock confirmation shows the updated points or credit. Nothing changed about the rate itself.

Common mistakes

Confusing basis points with discount points. One point is 100 basis points of price.
Reading a price change as a rate change.
Assuming a Treasury move of a few basis points translates directly to the same move in mortgage rates.

For why two quotes can differ by basis points on the same day, see comparing quotes.

Next step

If a lock confirmation or quote uses terms you are not sure about, send it over and I will translate it into plain numbers. Book a call, or start an application.

Sources

Links checked Oct 21, 2026.

HUD Mortgagee Letter 2023-05, Reduction of FHA Annual MIP Rates (effective for case numbers endorsed on or after Mar 20, 2023): https://www.hud.gov/sites/dfiles/OCHCO/documents/2023-05hsgml.pdf
HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, II.A.2 Allowable Mortgage Parameters and Appendix 1.0 Mortgage Insurance Premiums (Update 17, issued Nov 26, 2025, the version in effect today; Update 18, issued Aug 12, 2026, may be adopted now and must be used by Nov 10, 2026, and does not change the rules cited here): https://www.hud.gov/sites/default/files/OCHCO/documents/40001-hsgh-Update-17.pdf
CFPB Ask CFPB, What are discount points and lender credits and how do they work? (retrieved Oct 21, 2026): https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-136/
U.S. Treasury, Daily Treasury Par Yield Curve Rates (daily data, retrieved Oct 21, 2026): https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve

About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.

Equal Housing Opportunity.

Last reviewed: Oct 2026

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