Why Is My Loan Amount Higher Than the Purchase Price?

The purchase price of a home refers to the agreed-upon value of the property itself. However, when you secure a loan to buy that home, the total loan amount can often be higher than this purchase price. This difference arises because various additional costs are associated with both the home purchase and the financing process. Understanding these common additions provides clarity on why your loan principal may exceed the property’s sticker price.

Understanding the Discrepancy

The primary reason a loan amount can exceed the purchase price stems from the fundamental difference in what each figure represents. The purchase price is solely the cost of the real estate. In contrast, the loan amount encompasses the property’s value, plus expenses for loan origination, fees, and pre-payments necessary to finalize the transaction.

These additional amounts are frequently rolled into the total loan principal, especially if the borrower does not bring substantial cash to closing. This allows borrowers to spread these costs over the life of the loan, rather than paying them all upfront. The initial loan balance reflects both the property’s cost and the financed portion of these associated charges, leading to a higher overall borrowed sum.

Common Costs Included in Your Loan

Closing costs and prepaid expenses contribute significantly to the higher loan amount. Closing costs are fees charged by lenders and third parties for processing the loan and transferring property ownership. These fees are a standard part of real estate transactions.

Loan origination fees, for instance, are charged by the lender for processing the loan application and are typically 0.5% to 1% of the loan amount. Appraisal fees, which assess the home’s value, generally cost between $300 and $500. Title insurance, protecting both the lender and buyer against property title claims, can range from a few hundred dollars to several thousand, often around 0.5% to 1% of the sale price.

Attorney fees, where required, typically range from $750 to $1,250 for a standard residential closing. Recording fees, paid to local government for registering the property transfer and mortgage, often average around $125. Escrow fees, paid to a neutral third party managing the closing process, often sit around 1% of the home sale price.

Prepaid expenses are costs paid at closing that cover expenses accruing after the closing date. These include prepaid property taxes, collected at closing to cover the period immediately following the sale and to fund the initial escrow account. Lenders typically require homeowners insurance premiums for the first year to be paid upfront. An initial contribution to an escrow account for future property taxes and insurance payments is also often collected. These costs are frequently financed into the loan, which directly increases the total principal amount borrowed.

Loan-Specific Features and Structures

Beyond standard closing costs, certain loan structures and features can also cause the initial loan amount to be higher than the property’s purchase price. These are distinct from typical transaction fees and relate to how the loan itself is designed or utilized.

Mortgage Points

Mortgage points, also known as discount points, are a form of prepaid interest. Borrowers can pay these upfront to reduce the interest rate on their loan, thereby lowering their monthly payments over the loan’s term. Each point usually costs 1% of the total loan amount, and financing these points directly adds to the loan principal.

Mortgage Insurance Premiums

Mortgage insurance premiums can also be financed. For Federal Housing Administration (FHA) loans, an Upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount is required. While borrowers can pay this in cash, it is commonly rolled into the loan, increasing the total principal. Private mortgage insurance (PMI) for conventional loans with less than a 20% down payment is typically paid monthly, but some lenders may offer options to pay a portion or the entire amount upfront, which can be financed.

Renovation or Construction Loans

Renovation or construction loans are designed to include costs beyond the initial purchase price. These loans factor in expenses for planned improvements or construction, meaning the loan amount is based on the property’s estimated value after renovations are complete. This allows borrowers to finance both the acquisition of the property and the subsequent work into a single loan, resulting in a higher initial principal.