What is a fee paid to a lender at closing to provide the borrower with a lower note rate?

The fee paid to a lender at closing to provide the borrower with a lower note rate is known as a discount point. Discount points are essentially upfront fees that a borrower pays to reduce the interest rate on their mortgage. Each point typically costs 1% of the loan amount and generally lowers the interest rate by a corresponding amount. This mechanism allows borrowers to save on monthly payments throughout the life of the loan, making it a strategic choice for those who plan to stay in their homes for an extended period.

In contrast, other fees such as the origination fee are charged by the lender for processing the loan, and the processing fee covers administrative costs involved in making the loan. Prepaid interest, on the other hand, refers to the interest that is paid in advance for the period before the first mortgage payment is due, which does not influence the note rate but rather relates to the timing of the first payments. Thus, while all these fees are associated with closing costs, only discount points directly lower the interest rate on the mortgage.