If you’ve just signed the papers for a home refinance or home equity loan, your loan isn’t quite final yet – and that’s by design. Due to a federal protection established under the Truth in Lending Act (TILA) of 1968, borrowers have what’s called the right of rescission, a 3-business-day period to reconsider and potentially cancel certain types of loans without penalty or explanation.
It’s important to know that the right of rescission covers only certain kinds of loans, like cash-out refinances or home equity loans on your primary residence. It doesn’t apply for loans used to buy a house or an investment property.
If you qualify for the right of rescission, though, you’ll want to know how it works. Here’s a breakdown of what it means, when it applies, how the 3-day window is counted and what to do if you’re having second thoughts about your loan.
- The right of rescission allows homeowners to cancel certain refinancing, such as home equity loans and home equity lines of credit (HELOCs), without penalty. Borrowers are given 3 business days (Saturday is considered a business day) after the contract is signed to rescind their loan under the right of rescission.
- The right of rescission does not apply to home purchase loans on new homes, investment properties or vacation homes.
- The right of rescission was put in place to help protect against predatory lenders and provide borrowers with the opportunity to review their loan terms one final time before committing to the contract.
What Does Right Of Rescission Mean?
The right of rescission is a legal clause established under TILA, created to protect consumers by allowing them to cancel certain mortgage-related loan agreements even after signing a promissory note. Lenders are required by law to give borrowers a Truth in Lending disclosure or Closing Disclosure form, plus two copies of a notice explaining the right of rescission.
The right of rescission applies only to home equity loans, HELOCs and certain mortgage refinances. You can’t use it if you change your mind about your purchase loan, such as a new home loan or an investment or second-home property.
If you exercise your right of rescission during the 3-day window, your lender will release its claim on the collateral (your property) and is legally required to refund any closing fees within 20 days. It won’t hurt your credit to rescind, and you don’t need to give your lender an explanation for your decision – just a written notification or form that you are invoking your right of rescission.
But you should only exercise this right if you’re certain you no longer want the loan: Once the written notice is in your lender’s hands and the rescission process begins, it cannot be reversed.
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How Does The 3-Day Rule Work?
You’ve signed your loan and suddenly have buyer’s remorse – or worse, you realize you can’t afford the payments. You want to exercise your right of rescission. But how does the 3-day rule work? First, understand that the clock doesn’t start ticking until these things all happen:
- You’ve signed your credit contract (also called the mortgage note or promissory note).
- You’ve received your Closing Disclosure.
- Your lender has provided two copies of the rescission notice, informing you of your right to cancel (or rescind) the loan within 3 business days.
Your 3-day rescission period begins the day after the above events occur. For example, if you sign your loan and receive all the required disclosures and rescission notices from your lender on a Monday, your 3-day period starts on Tuesday, and you’ll have until 11:59 p.m. on Thursday to cancel the loan.
However, remember that the 3-day period refers specifically to three business days – for rescission purposes, Sundays and federal holidays don’t count. So if you checked all of the above boxes on a Thursday, say, your 3-day period would start on Friday, and you’d have until 11:59 p.m. on the following Monday to rescind.
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Why Do People Invoke The Right Of Rescission?
You don’t need to give your lender a reason for rescinding on an applicable loan within the 3-day window, but some common reasons may include:
- You realize you can’t afford the loan. If you suddenly lose your job or your finances change, you may decide you don’t want to take on the extra payments anymore.
- You discover a much better deal from another mortgage lender and you want to switch your loan to them.
- You just decide you don’t want the loan. It’s fine to change your mind.
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How To Rescind Your Loan
There’s no single, set way to exercise your right of rescission, other than the requirement that it be a written notice. Some lenders require a specific form or additional documentation; others may only need a signed letter from the borrower stating the right is being exercised. But all lenders are legally required to explain how you can rescind your loan in advance. You’ll receive detailed instructions as part of the required Closing Disclosure and rescission notice when you sign your promissory note.
To cancel, you must submit your written notice (of whatever kind), either hand-delivered or mailed, to your lender before midnight on the third business day. Phone calls and emails don’t count. Also, if you mail your rescission notice, make sure it’s postmarked within the rescission period and that you receive a receipt to that effect: You need to keep proof that you rescinded the loan within the time frame allowed.
After receiving it, your lender may reach out to confirm. By law, they then have 20 days to refund any fees you paid at closing. (You’ll also need to return anything you received as part of the loan.)
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What Loans Qualify For The Right Of Rescission?
Since not all home loans do, you may be uncertain if the mortgage or refinancing you’re taking out allows for rescission. As noted earlier, in cases where a loan does qualify, your lender is required to give you two notices of your right to rescind along with your Closing Disclosure/Truth in Lending documents, which they usually do at the closing. But it’s a good idea to know whether you’ll have this right well before the closing day, so if you’re not sure, ask your lender in advance.
Loans That Qualify For The Right Of Rescission
- Home equity line of credit (HELOC)
- Home equity loan
- Bridge loan (that uses your home as collateral)
- Cash-out refinance with your existing lender (certain conditions apply)
- Reverse mortgage
- Any refinance with a new lender
Loans That Do Not Qualify For The Right Of Rescission
- A home mortgage on a new home (whether new construction or a home listed for resale)
- Vacation home mortgage
- Investment property mortgage
- Business loan using your primary home as collateral
- Rate-and term refinance with your existing lender
Right Of Rescission Vs. Cancellation On A Home Loan
The right of rescission allows you to cancel your loan under certain conditions, but it is not the same action as a mortgage loan cancellation.
Right of rescission on a home loan: The right of rescission gives you 3 business days after closing to change your mind about certain types of home loans. If you decide to back out during that time, you can cancel the loan and get your money back without any penalty.
Loan cancellation on a mortgage: Any mortgage loan can be canceled (by the lender or borrower) for various reasons, and this can happen at almost any point during the loan term. However, canceling a mortgage loan doesn’t necessarily come without penalties or allow you to have all your money returned.
FAQ
The Bottom Line: The Right of Rescission Gives You Time To Reconsider Your Loan
Taking on a major loan, especially one that uses your home as collateral, can feel scary. Fortunately, if you’ve just closed on a home equity loan, HELOC or another qualifying loan, you do still have a brief period of time to decide whether or not you truly want this loan. Thanks to the right of rescission, you are legally guaranteed 3 full business days to cancel the loan without penalty, loss of funds or any impact to your credit.
The right of rescission can give you some breathing room to carefully review your lender’s terms, decide if the loan still aligns with your financial goals and confirm that you’re comfortable with the new monthly payments.
If you’re considering a home equity loan or want to refinance your mortgage, compare lenders and rates to learn more about your options.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
