What Are Points?
Points can be a percentage of a number or a measurement of the change in a number. Points are used in various contexts in financial matters. They may indicate the interest rate on a mortgage in relation to the prime lending rate or the total size of the fees attached to a mortgage. They indicate the percentage of change in the return on a bond. They also are used to report the price movements up or down of stocks.
Key Takeaways
- A point always equals one.
- It may equal one percent (as for a change in a bond price) or $1 (for a stock price).
- A mortgage point may indicate the percentage of fees attached to the loan or the loan's premium over the prime interest rate.
Points are sometimes referred to as basis points (bps).
Understanding Points
A point always expresses a quantity of one of something. From there, its definition and uses vary. A point sometimes, but not always, indicates a percentage.
- In bonds and debentures, a single point is a 1% change in the face value of the investment. If a bond sells at two points under par, it has sold at 2% less than its face value.
- In stocks, movements of stocks or stock indexes are often reported in points, with one point equaling $1. If a stock opens a session at $23 and ends the day at $25, it is said to have gone up two points.
- In futures contracts, a point is a price change of one one-hundredth of one cent.
Points in Mortgages and Other Loans
In banking, a point may refer to the percentage difference between a mortgage or any other loan and the prime interest rate prevailing at the time.
For instance, a credit card may be offered at a low introductory rate that converts in six months to an interest rate of 12.99 points over the prime lending rate. In mid-2020, the prime rate was 3.25% so the interest rate on the card would be 16.24%.
If a bank advertises a mortgage's rate as prime plus two points, this means that the loan's interest rate is 2% plus the prime rate of lending. If the prime rate is 3.25%, the mortgage rate is 5.25%.
In mortgages, a point also may indicate the size of the loan origination fee charged by the lender. Each point is equal to 1% of the amount of the loan. If a bank offers a $200,000 mortgage with a three-point origination fee, the loan has a $6,000 origination fee.
Points in Stocks and Other Securities
Just to add to the confusion, a point has a different definition when used to describe the price movement of a bond, a futures contract, or a stock.
- A two-point increase in a bond's price indicates a 2% change in its value, such as an increase from $10,000 to $10,200.
- A two-point increase in a futures contract correlates to an increase of two-hundredths of a cent, the equivalent of 2% of a penny.
- A two-point increase in the price of a common stock share is a $2 increase, such as a $100 stock rising to $102.
