What financial tool is used to calculate the percentage difference in loan terms, such as interest rates?

The basis point is a key financial tool used to quantify changes in interest rates and other financial percentages. One basis point is equal to one-hundredth of a percentage point (0.01%), making it a precise way to express small changes in financial metrics.

When discussing loan terms, particularly interest rates, understanding differences can be crucial for borrowers and lenders alike. For example, if an interest rate increases from 3.00% to 3.25%, this change is 25 basis points, which allows for a clear and concise understanding of the shift without using percentage terms that may be more difficult to calculate mentally.

Using basis points helps maintain clarity in financial discussions, especially when comparing multiple loans or products in a market where even tiny changes can have significant implications. Other terms like interest rate, loan-to-value ratio, and amortization schedule serve different purposes in mortgage financing and do not provide the same level of specificity in measuring changes in interest rates.