If you’re having second thoughts about a mortgage refinance or a home equity loan, you might have some legal wiggle room to get out of the deal. The right of rescission is a legal protection under the Truth in Lending Act (TILA) that allows you to cancel certain home financing agreements without any financial penalties. However, this benefit is available only in limited circumstances.
What is the right of rescission?
The right of rescission gives you the legal grounds to rescind (hence the name) your portion of certain home financing agreements. In other words, a rescission in mortgage speak is your chance to back out and cancel the agreement with your lender.
The caveat is that you only have three days to take advantage of your right of rescission, and it only applies to certain home financing agreements.
You’re not required to give a reason for exercising your right to cancel an eligible mortgage contract — say wanting to shop around a little more, especially if you’ve found a better deal, or if you believe you’ve made a mistake.
Another valid reason, according to Shashank Shekhar, CEO of InstaMortgage in San Jose, California, is if you notice fine print you weren’t aware of at the time of closing or that was altered without your knowledge.
Right of rescission and TILA
Your right of rescission in mortgage lending is thanks to the Truth in Lending Act (TILA). TILA was first enacted in 1968 in an effort to protect borrowers from predatory lending practices.
When can the right of rescission be exercised?
You can exercise the right of rescission within three days of signing an agreement with a home loan lender if the loan applies to your primary residence. In other words, you don’t get rescission mortgage rights for vacation, rental or investment properties.
You don’t have the right to rescind a residential mortgage transaction, but you can exercise this right for HELOCs, home equity loans and refinances.
Additionally, you can only use the right of rescission if you’re either working with a new lender or getting a loan amount larger than the unpaid principal on your mortgage with your current lender.
You also can’t exercise the right of rescission if:
The contract stipulates that a state agency is the lender
You’re renewing optional insurance premiums
When does the right of rescission start?
The clock starts on your right of rescission as soon as all three of the following events occur:
You sign the mortgage contract (the “mortgage note”).
You receive the TILA disclosure, or the closing disclosure document.
You receive two copies of a notice of rescission, telling you about your right to rescind the contract.
Once that happens, you’ll have until midnight on the third business day after the transaction to cancel your agreement. Business days include Saturdays, but not Sundays or legal public holidays. For example, if you completed the closing on the Friday before Memorial Day weekend, you’d have until midnight on the following Wednesday to exercise your right of rescission.
How to exercise the right of rescission
The easiest way to cancel your mortgage agreement is to use the notice you received from your lender about your right of rescission. “Any titleholder can sign it and send it either to their lender or the closing agent to rescind the loan closing,” says Shekhar. You could also write a letter. In either case, you must deliver or mail it by midnight on the third business day after the transaction.
Once received, the lender must comply with a full refund within 20 days from the date of your notice of rescission. Keep in mind that once you rescind the loan contract, there’s no going back. “If the borrowers aren’t sure about something, they should first seek clarification from their lender,” says Shekhar. “It would be a shame to cancel a transaction altogether for [a] confusion that could have been easily clarified.”
What happens if you don’t receive the TILA disclosure or notice of right to rescind?
If for some reason you never received the TILA disclosure or notice of rescission, or if these documents were inaccurate, you could have up to three years to exercise the right of rescission.
Remember: Your lender must give you a written notice (the closing disclosure) that outlines the loan’s annual percentage rate (APR), finance charge, amount financed, total payments, payment schedule and other details.
Bottom line on the right of rescission
The right of rescission is your opportunity to back out of refinance, home equity loan or HELOC agreements with a new lender within three days of signing the contract. When the legal right to rescission in mortgage agreements applies, you can expect cancellation of the contract and a full refund.