In the 800 series of items on the HUD-1 Settlement Statement, there is an item for "Loan Discount." This is a fee, usually expressed as a percentage or points on the loan that is paid by the Buyer to "buy down" the interest rate. In other words, the buyer might pay 1 point or 1% of the loan amount to buy down the interest rate an eighth of a percent for lower payments over the life of the loan.
Usually the decision about whether to do this will be based on how long the borrower intends to keep the loan, as the payment up front will take time to be amortized, thus the benefits are pushed out in time. The lender is willing to drop the interest rate for this up front payment of "interest in advance." Here's an example:
$200,000 mortgage loan at 8.50% for 30 years would carry an approximate payment of $1502.53/month for principal and interest.
The same loan at 8.125% would carry a principal and interest payment of approximately $1484.99/month for the 30 years.
If the borrower paid 1 point, or 1%, to buy down the loan that eighth of a point, it would take about 114 months at $17.54/month payment savings to break even on the $2000 cost up front.
The loan discount fee would normally show up in the left column (Paid from Borrower's Funds at Closing) and be a DEBIT to the Buyer side of the transaction.
