Change in interest rate after locking

Ask Kate about change in interest rate after locking (aka home appraisal value squashes mortgage rate lock agreement): Hi Kate, I locked in our mortgage refinance rate at 4.25%. Subsequently, the appraisal came back quite a bit lower than the appraisal that had been done one year earlier when we got our home equity loan, so the bank told me that the locked rate had now increased to 4.5%.

Continued... Instead of falling for what I consider to be a bait and switch (since I assume the bank is the one profiting off the interest rate that is now a quarter point higher), I decided to walk away from the deal. The bank says that I now owe $400 for the appraisal fee because they had no control over the appraisal coming in lower. I understand that the appraisal is separate and that the bank had no control over the result, but at no time did the bank ever disclose, verbally or in writing, that the lock could change based on any particular factor.

Had we been told up front that whether we could actually lock in at the 4.25% would depend on what the appraisal showed, we would not have gone through with it and instead shopped around to find someplace where a lock really means a lock and subsequently we did just that through our local credit union.

What especially infuriates me is that the bank told me after the appraisal came in that there weren't surprised, as mine was the 4th or 5th case they've seen recently where the appraisal came in much lower than they expected. In my mind, that is all the more reason to disclose ahead of time that there was a possibility of that happening and therefore not getting the lock that we bargained for.

I assume the bank was hoping that we would feel we were already too invested in the process and just accept the rate change amounting to thousands of dollars over the life of the loan.

There is nothing in the paperwork we signed requiring us to pay the appraisal fee up front, and nothing indicating it is nonrefundable. Are we obligated to pay the bank for the appraisal fee, or should the bank absorb that as a cost of doing business because they should have, but failed to, disclose that the "lock" could change? Thank you in advance!

Kate Answers: Change in Interest Rate After Locking

Hi and thanks for writing,

Mortgage rate lock agreements should disclose that interest rates are "Locked Subject To", followed by a laundry list of common reasons that could potentially cause your mortgage rate to rise before closing.

At the root of this is something called LLPA, loan level pricing adjustments, also known as add-ons.

Loan Level Pricing Adjustment - Gift that Keeps on Giving

Allow me to explain. Say the interest rate is locked at 4.25%, anticipating there will be at least 20% equity in the home. But the appraisal comes in lower. This inferior appraised value pushes the loan-to-value over 80%, subsequently raising the rate to 4.5 due to the .25% LLPA add-on. (4.25 + .25 = 4.5)

In the current market, where appraised values have been decimated in cities across the nation, yes, it would be prudent to inform mortgage borrowers of the risk. Enough said.

Combing the Mortgage Interest Rate Lock Agreement

You asked if you are obligated to pay the bank for the appraisal fee. I'd go through your loan disclosures with a fine tooth comb to see what you signed, including the mortgage interest rate lock agreement. I believe you'll find your answer.

This is why I say to read, read, read the mortgage disclosures when they are first handed to you. Know what you are signing. Interest rate lock agreements are long, boring, and overflow with legalese. But once your signature is on them, you've agreed to the mortgage company's terms.

So read them in their entirety. And remember, if a concern you've voiced is countered with, "oh that's not important" or "that would never happen", ask for a written revision, signed by someone with the authority to alter their agreements!

Ask Questions Before Signing Rate Lock Agreements

Here are more questions to ask before signing mortgage rate lock agreements. I hope you'll contribute questions that you have asked before locking in your mortgage rate (or wish you'd asked)! Leave them in the comments and I'll add them to the list. (See link at the bottom of this page leading to the comments form.)

Best wishes,

P.S. I suppose there is some amount of risk that the mortgage company could send an unpaid appraisal bill to collections. So make sure you know what you agreed to before ignoring the request to pay for the home appraisal.

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