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What are basis points and how do they affect your real estate loan?

If you’re applying for a commercial real estate loan, you may come across the term “basis points,” also referred to as BPs or “bips.” Basis points are a way to express changes in interest rates, fees, and other financial metrics. One basis point is equal to 0.01%, or one hundredth of a percentage point.

Basis points are important in commercial real estate lending because even small changes in interest rates can have a significant impact on your loan payments over time. For example, if your loan has an interest rate of 5%, and the lender increases the rate by 25 basis points, your new interest rate would be 5.25%. While this may not seem like a significant change, it could increase your monthly payments and the total amount you pay in interest over the life of the loan.

In commercial real estate lending, lenders often use basis points to express the fees they charge for a loan, such as origination fees, prepayment penalties, and late fees. These fees are typically expressed as a percentage of the loan amount, but lenders may also use basis points to express them. For example, a lender may charge an origination fee of 1% of the loan amount, or 100 basis points.

Understanding basis points is important when comparing loan offers from different lenders. Even a small difference in basis points can have a significant impact on the total cost of borrowing. It’s important to carefully review the terms of each loan offer and compare the interest rates, fees, and other terms in order to choose the loan that best meets your needs.

In summary, basis points are a way to express changes in interest rates and fees in commercial real estate lending. Understanding how basis points work and how they can impact your loan payments can help you make informed decisions when applying for a commercial real estate loan.

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