Right of rescission: Canceling a HELOC, home equity loan or refinance

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 thanks to the right of rescission. However, the rescission mortgage benefit is available only in limited circumstances — and for a limited time.

What is the right of rescission?

First, let’s define rescission as it relates to a mortgage loan transaction. 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. 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.

Specifically, this legal right applies only to mortgage refinances, home equity loans and home equity lines of credit (HELOCs), not purchase loans.

You’re not required to give a reason for exercising your right to cancel an eligible refinance or second 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, founder and 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.

How does the right of rescission work?

Under the right of rescission, you have until midnight of the third business day after the transaction to notify the lender of your decision to back out of the lending deal. You can provide notification by mail or other forms of written communication.

Once you’ve provided a notice of rescission to the lender, the financing agreement becomes void, and you’re no longer liable for the agreement or any finance charges related to the agreement. The lender has 20 days after receiving notice of your decision to refund any money you paid toward the deal and give up its claims to the property. In addition, the lender must take any remaining steps to end the deal. If you received any money as part of the transaction, you must also return it once the lender has fulfilled its part of the rescission agreement.

When can the right of rescission be exercised?

If the loan applies to your primary residence, you can exercise the right of rescission within three days of signing an agreement with a home loan lender. 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 mortgage you initially used to buy a home, 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

If you are interested in exercising the right of rescission, follow these steps:

• Sign and submit the notice of rescission: The easiest way to cancel your mortgage agreement is to use the notice of rescission that you received from your lender about your right to rescind. “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.
• Wait 20 days for the lender to act: 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.”
• Return any funds received: If you received any money as part of the transaction, you must return it to the lender once the lender has canceled the lending deal.

What happens if you don’t receive the TILA disclosure or notice of right to rescind?

If 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: In addition to your notice of rescission, 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.