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 mortgage agreements within three days without any financial penalties. However, this benefit is available only in limited circumstances.
What is the right of rescission?
The right of rescission applies only to mortgage refinances, home equity loans and home equity lines of credit (HELOCs), not purchase loans. Additionally, you can’t exercise the right in the following situations:
- If you’re refinancing or consolidating a mortgage with the same lender, though the protection does apply if the new amount financed is higher than the unpaid balance
- If the contract stipulates that a state agency is the lender
- If you’re renewing optional insurance premiums
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.
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 “promissory note”)
- You receive the TILA disclosure, or the closing disclosure document
- You receive two copies of a notice of 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.
Alternatively, you could write a letter. In either case, it must be delivered or mailed 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 rescission date.
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 the right to rescind the agreement, or if they 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.
Right of rescission and TILA
The Truth in Lending Act (TILA) was first enacted in 1968 in an effort to protect borrowers from predatory lending practices, and includes the three-day right of rescission. The Real Estate Settlement Procedures Act (RESPA) of 1974 also protects borrowers by mandating that lenders furnish disclosures about a mortgage, among other provisions, within a certain timeframe. Under the TILA-RESPA Integrated Disclosure (TRID) rule (also called “Know Before You Owe”), all mortgage lenders are required to provide a loan estimate and closing disclosure to borrowers.