Niederlauterstein is a dispersed settlement (Streusiedlung), situated about 3.5 km (2.2 mi) north-east of Marienberg in the Ore Mountains.

It extends from the left bank of Schwarze Pockau river for about 1.5 km (0.93 mi) westward on a steep slope.

The ruined Lauterstein Castle which formed the origin of the settlement is situated on a rock spur above the river, at the eastern end of the village.

A former miners' settlement dating back to the 12th century, the abandoned village Schwedengraben, is located about 1 km (0.62 mi) southwest of Niederlauterstein.

[10][11] After Schlossmühle mill on the right bank of Schwarze Pockau burned down in 1860, a flax spinnery was built in its grounds in 1865.