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

The fee that contributes to a lower note rate for the borrower at closing is known as a discount point. When a borrower pays discount points, they are essentially opting to pay upfront to reduce the interest rate on their mortgage loan. Each point typically costs 1% of the loan amount and corresponds to a reduction in the interest rate, often by about 0.25%.

This mechanism allows borrowers to achieve lower monthly payments, making homeownership more affordable in the long run. It is a strategic decision, as paying discount points can be beneficial for borrowers who plan to stay in their homes for an extended period, allowing them to recoup the upfront cost through savings from lower interest payments over time.

In contrast, the other fees listed are standard costs associated with the mortgage process but do not directly lower the note rate. The processing fee covers administrative costs, the application fee is generally for initiating the loan process, and the origination fee compensates the lender for processing the loan but does not specifically relate to the adjustment of the interest rate as discount points do.