How Interest Rates Can Effect You and Your Payment When Buying a Home

The Standard Explaination . . .

Basis points are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. In most cases, it refers to changes in interest rates and Bond yields.

For example, if the FED, the federal Reserve Board raises interest rates by 25 basis points, it means that rates have risen by 0.25% percentage points. If rates were at 2.50%, and the Fed raised them by 0.25%, or 25 basis points, the new interest rate would be 2.75%.

In the bond market, a basis point is used to refer to the yield that a bond pays to the investor. For example, if a bond yield moves from 7.45% to 7.65%, it is said to have risen 20 basis points.

The usage of the basis point measure is primarily used in respect to yields and interest rates, but it may also be used to refer to the percentage change in the value of an asset such as a stock. It may be heard that a stock index moved up 134 basis points in the day's trading. This represents a 1.34% increase in the value of the index.

The easiest way to convert basis points into a percent form is by taking the amount of basis points and multiply by 0.0001 which will give the percent in decimal form. So if you have to convert 384 basis points into a percent, simply multiply 384 by 0.0001. This will give you 0.0384 which is 3.84% (0.0384 x 100).

Why you need to care?
 

If you are reading this and wondering how does this actually effect my affordability when buying a home, you are on the right track as to where I am going with this information.

The difference between 4½ and 6¼ can mean a big change to your affordability.

For example a single family home, where the borrowers have good credit ranging from (700-750), in Delray Beach FL for 250,000.00 with a conventional mortgage with 20% down ($50,000.00).

Your monthly payment for 30 years for an interest rate of 4.50 % on a loan amount of $200,000.00 would be $ 1013.37 a month

The same loan with an interest rate of 6.25 % on a loan amount of $200,000.00 would be  
$1231.43 a month.

That’s a difference of $218.06 each month 2,616.72 a year! Could you use $2600.00+ or so extra each year? I know I could.

Next time you hear interest rates may rise, and you are in the swing of a home purchase please consider this information, it really does affect your home buying affordability.