What Are Points?
Points can be a percentage of a number or a measurement of the change in a number. Points are used in various contexts in financial matters. They may indicate the interest rate on a mortgage in relation to the prime lending rate or the total size of the fees attached to a mortgage. They indicate the percentage of change in the return on a bond. They also are used to report the price movements up or down of stocks.
- A point always equals one.
- It may equal one percent (as for a change in a bond price) or $1 (for a stock price).
- A mortgage point may indicate the percentage of fees attached to the loan or the loan's premium over the prime interest rate.
Points are sometimes referred to as basis points (bps).
A point always expresses a quantity of one of something. From there, its definition and uses vary. A point sometimes, but not always, indicates a percentage.
- In bonds and debentures, a single point is a 1% change in the face value of the investment. If a bond sells at two points under par, it has sold at 2% less than its face value.
- In stocks, movements of stocks or stock indexes are often reported in points, with one point equaling $1. If a stock opens a session at $23 and ends the day at $25, it is said to have gone up two points.
- In futures contracts, a point is a price change of one one-hundredth of one cent.
Points in Mortgages and Other Loans
In banking, a point may refer to the percentage difference between a mortgage or any other loan and the prime interest rate prevailing at the time.
For instance, a credit card may be offered at a low introductory rate that converts in six months to an interest rate of 12.99 points over the prime lending rate. In mid-2020, the prime rate was 3.25% so the interest rate on the card would be 16.24%.
If a bank 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 3.25%, the mortgage rate is 5.25%.
In mortgages, a point also may indicate the size of the loan origination fee charged by the lender. Each point is equal to 1% of the amount of the loan. If a bank offers a $200,000 mortgage with a three-point origination fee, the loan has a $6,000 origination fee.
Points in Stocks and Other Securities
Just to add to the confusion, a point has a different definition when used to describe the price movement of a bond, a futures contract, or a stock.
- A two-point increase in a bond's price indicates a 2% change in its value, such as an increase from $10,000 to $10,200.
- A two-point increase in a futures contract correlates to an increase of two-hundredths of a cent, the equivalent of 2% of a penny.
- A two-point increase in the price of a common stock share is a $2 increase, such as a $100 stock rising to $102.