What is a basis point in terms of loan amount?

What is a basis point in terms of loan amount?

• A. 1% of the loan amount
• B. 0.1% of the loan amount
• C. 0.01% of the loan amount
• D. 1/100th of 1% of the loan amount

Answer: (D)

A basis point is defined as one-hundredth of one percent, which can also be expressed mathematically as 1/100th of 1%. This means that for every basis point, there is a 0.01% change in the measurement being discussed. When applied to loan amounts, it provides a precise way to discuss interest rates and fees without using fractional percentages. For example, if a loan amount is $100,000, then one basis point would equal $10, which is 0.01% of that amount. This clarity helps lenders and borrowers communicate about small changes in interest rates or fees. Understanding this concept is essential for accurately assessing costs associated with loans, which is a critical aspect of mortgage lending.

A basis point is defined as one-hundredth of one percent, which can also be expressed mathematically as 1/100th of 1%. This means that for every basis point, there is a 0.01% change in the measurement being discussed. When applied to loan amounts, it provides a precise way to discuss interest rates and fees without using fractional percentages.

For example, if a loan amount is $100,000, then one basis point would equal $10, which is 0.01% of that amount. This clarity helps lenders and borrowers communicate about small changes in interest rates or fees. Understanding this concept is essential for accurately assessing costs associated with loans, which is a critical aspect of mortgage lending.