Q: I applied for a refinance with my current lender. I did my application over the phone and was then told the rates and options. I was told I would most likely not need an appraisal, but if I did need one, the lender would pay for it.

I locked in the rate and terms and paid the $395 application fee by credit card. Three weeks later I was told the lender did want an appraisal – but not to worry as I would not be responsible for payment of the appraisal fee.

My home appraised $50,000 less than my mortgage balance and so the rates and terms changed drastically. I was sent an email that my initial terms and rate could not be given to me and if I didn’t take the new terms and fees, I would lose my $395 application fee.

This does not sound legal or ethical to me since the terms I was offered after the appraisal were different than what I was quoted. Am I stuck with the higher rates and points and will I lose my $395 if I don’t go through with the refinance?

A: I don’t have good news for you. You told the lender on the phone what your property was worth. The lender priced the loan based on that information. Unfortunately, your estimate of what your property was worth was $50,000 short. Because you don’t have the home equity that the lender requires, you cannot get the loan you were hoping to get.

You are now stuck with the higher interest rate and higher fees or you’ll be out your $395. If you look at the paperwork, you’ll see that it likely includes language that requires your home to appraise out in value in order to qualify for the quoted interest rate, fees, and terms.

The lender isn’t trying to scam you. It’s that the government is now backing about 90 percent of loans out there and Uncle Sam is extremely strict about what kind of home equity you have during a refinance.

In fact, the U.S. government is not only backing about 90 percent of the home loans being done right now, but it has been purchasing more than $1 trillion of U.S. housing-backed securities. If the government wasn’t buying these securities, mortgage interest rates would be far higher than they are.

Your biggest problem is that you’re $50,000 underwater with your mortgage. While you’ll be out the $395, you may be best off sticking with the loan you have (provided the interest rate isn’t over 8 percent) until you have paid down more of your loan balance.

By the way, the fee you paid up front is usually enough to cover the lender for the cost of an appraisal and credit report. The fact that the lender said to you that you would not have to pay for the appraisal may be that the fee for the appraiser would probably not show as paid by you and the $395 fee would be applied towards other costs. That may not make you feel better, but if you had not qualified for other reasons, the lender might not be required to return to you the fee.

If you feel that the appraiser was in error in determining the value of your property, you might want to research what homes have recently sold in your area. If homes are selling for prices that approach what you thought was the value of your home, you might be able to go back to the lender

Read more on low appraisal issues, loan refinance problems and declining home values

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Refinancing Mortgage Loans When Home Prices Have Fallen

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