Interest rate changes are quoted in basis points. One basis point is one-100th of 1 percent. Therefore, if your mortgage rate increases by one-quarter of one percent, your interest rate jumped by 25 basis points. Stock and bond price changes also are often quoted in basis points. Your mortgage payment and mortgage insurance premium will increase if your rate is subject to basis point hikes.
If you have an adjustable rate mortgage, your payment may increase at adjustment dates, because your interest rate may increase by some basis points. Should your interest rate increase by 25, 50 or 100 basis points, it's easier to simply state the increase in terms of a quarter, one-half or 1 percent. If your rate increases by other amounts, such as 0.34 percent, it is more understandable to state that the rate increased by 34 basis points.
Since your mortgage payment is a combination of principal repayment and your interest rate, basis point hikes will increase your monthly payment. If you haven't closed on a new mortgage yet, you should lock your rate at application or approval. Should you not do this, you may pay basis point hikes in the form of a higher interest rate. In some cases, the mortgage payment increase may disqualify you from getting the mortgage, should the new payment drive your debt ratios too high for the loan you want.
Many mortgages come with one or two points. One point equals 1 percent of your mortgage amount. Should the current mortgage rate be too high for you to qualify for the mortgage you want, you can "buy" a lower rate by adding discount points, which lower your contractual mortgage rate. In normal markets and economies, paying one discount point typically will lower your start rate, if your mortgage is an ARM, or the full term of your mortgage, if has a fixed rate, by 25 basis points.
Mortgage Insurance Premiums
Mortgage insurance premiums subject to basis point hikes also increase your mortgage payment, if you pay premiums monthly, or your charge at the beginning of a new calendar year, if you pay the annual premium. For example, the Federal Housing Administration increased its mortgage insurance premiums by 10 basis points in 2013. If you have an FHA mortgage, you will now pay an annual premium of 1.3 percent when you put 5 percent or more down and 1.35 percent if you bought your home with less than a 5 percent down payment. The annual premium is divided by 12 and added to your monthly mortgage payment.
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