What is the basis point conversion for a discount point?

A discount point is typically defined as one percent of the total loan amount and affects the interest rate on a mortgage loan. In terms of basis points, each discount point corresponds to a reduction of interest rate by a certain number of basis points, which are frequently used in financial contexts to represent interest rates or changes in financial percentages.

In lending, one basis point is equal to one one-hundredth of a percentage point (0.01%). Therefore, a discount point, which is 1% (or 100 basis points), represents a cost of 100 basis points because it corresponds to a direct fee paid upfront at closing to lower the interest rate on the loan.

Understanding this conversion is crucial for mortgage professionals, as it helps in calculating the effective interest rates and associated costs for borrowers, thereby allowing for more informed financial decisions regarding loans.