Now that you know what BPS means, here are a few more details that will help you when thinking about your mortgage payments.

Why BPS?

BPS is simply an example of jargon that’s used in investor and lender circles in order to avoid communication errors around percentages and decimal points. Considering 1 basis point will always be equal to 0.01% or 1/100th of a percent, a basis point becomes a universal measurement and eliminates any ambiguity when it comes to calculating interest rates across a number of financial instruments.

How Important Can A Hundredth Of A Percent Be?

A fraction of a percent doesn’t seem like much, but a hundredth of a point on a loan as big as a mortgage can mean a huge savings — think tens of thousands of dollars.

Let’s say you wanted to buy a home that’s worth $300,000 (with 20% down).  You have the options to get a mortgage rate that’s either 3.25% or 3.00% on a 30-year conventional loan. With the first rate, you’ll pay $1,306 per month and $170,023 in interest throughout the lifetime of the loan. Compare this to it being just 25 basis points lower — you’ll pay $1,265 per month (which isn’t that big of a difference at $40), but you’ll pay $155,532, a staggering $14,419 difference in interest.

Will My Monthly Payments Change Constantly?

Your monthly payments will depend on the type of mortgage you take out. For fixed-rate mortgages, your monthly payments will remain the same throughout the lifetime of the loan. For adjustable rate mortgages, or an ARM, your monthly payments will be affected by fluctuating rates.

Also called a variable rate mortgage, an ARM has a fixed interest rate for an initial period of time, depending on your loan terms. Your rate could go up or down depending on the current benchmark or index rate, plus whatever your lender adds on by way of an ARM margin.

Compare this to interest-only mortgages where you start off with a fixed low introductory payment period during which you’re only paying off interest from your loan. After this period is over, you’ll need to make larger payments that incorporate the principal balance.

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