What are 'Points'
A point is a measurement used to express the interest rate of a mortgage or changes to that interest rate. It also refers to shifts in the price of a security. Depending on the context, points, sometimes referred to as basis points (bps), reference different measurements, but in all cases, a point expresses a quantity of one of something.
BREAKING DOWN 'Points'When discussing bonds, a point indicates a 1% change relative to the bond's face value. In futures contracts, a point refers to a price change of one one-hundredth of 1 cent. A point also refers to a $1 price change in the value of common stock. In real estate mortgages, a point refers to the origination fee charged by the lender, with each point being equal to 1% of the amount of the loan. It can also refer to each percentage difference between a mortgage's interest rate and the prime interest rate.
How Points Work With Securities
To understand how a point effects certain securities, it's important to know the differences between the meaning of point in various contexts. For example, if someone has a $10,000 security and it increases by two points, this means different things depending on the type of security. When discussing changes in bond prices, a two-point increase indicates a 2% change in value, meaning an increase from $10,000 to $10,200. With a futures contract, however, a two-point increase correlates to an increase of two hundredths of a cent, or the equivalent of 2% of a penny, while a two-point increase on common stock worth $10,000 increases its price to $10,002.
How Points Work With Mortgages
A point can reference multiple items when discussing mortgages. For example, if a lender advertises a mortgage's rate as prime plus two points, this means that the loan's interest rate is 2% plus the prime rate of lending. If the prime rate is 5%, the mortgage rate is 7%. Similarly, adjustable rate mortgages (ARM) adjust their rates by adding a margin to an index rate, and the margin may be referred to in terms of points. For example, if someone takes out an ARM with a four-point margin and the index associated with the mortgage is 6%, when the rate adjusts, it is 10%.
Additionally, if a bank charges an up-front fee for the loan, it often expressed in terms of points as well. In this case, a point references the percentage of the total mortgage represented by the fee. To illustrate, if someone takes out a $200,000 mortgage and the origination fee is $6,000, the loan has a three-point origination fee.