The right of rescission is your legal right to cancel some home loan agreements without any financial penalties as long as it’s done within three days of signing. The right of rescission is only good for some types of loans and doesn’t include new home purchase loans.
When you sign on the dotted line, it’s almost always complete and final. But depending on the type of loan you get, the right of rescission is the one way you can get out of a final mortgage contract. Here’s how it works, what loans have the right of rescission, and when it can be used.
Definition and Examples of the Right of Rescission
If you’re taking out a home equity loan, home equity line of credit (HELOC), or refinancing your home loan with a different lender, you have three days from when you sign the contract to rescind the deal. This is known as the right of rescission.
The right of rescission does not apply to mortgages or home loans used to buy a new house.
The right of rescission comes from the federal Truth in Lending Act (TILA), which was made to help protect borrowers and consumers from being pressured into loans and borrowing from questionable lenders.
When interest rates hit record lows and the housing market is hot, refinancing your current mortgage with a different lender might look enticing. However, if you were to rush through a refinancing application and end up with buyer’s remorse, you have the right of rescission. You can back out of your refinance up to three days after you’ve signed your contract or promissory note. Once the three days are up, you lose your right to rescind.
Another instance when you may want to exercise your right of rescission might be if you were planning to take out a home equity loan or HELOC, but then have a change in your financial situation.
How Does the Right of Rescission Work?
The right of rescission kicks in once all of these three things have happened:
- You’ve signed your contract or promissory note with a lender.
- You received a Truth in Lending disclosure, usually your closing disclosure form.
- You received two copies of a notice detailing your right to rescind.
Once all of these take place, you have until midnight on the third day to rescind. Saturdays—but not Sundays—count as business days. So if you sign your contract on a Friday, you have until midnight on Tuesday to rescind. Federal holidays are treated like Sundays, so keep that in mind when calculating your three-day window.
You can use the right of rescission when you:
- Refinance your mortgage with a different lender
- Cash-out refinance with a different lender
- Take out a home equity loan or HELOC
- Take out most reverse mortgages
If you decide to exercise your right to rescind, contact your lender immediately. While it’s not required, try to get everything in writing (such as via email) to show timestamps. This way, a lender can’t argue that you missed the window to exercise your right to rescind. Keep a paper trail as often and whenever possible.
A lender must provide you with a notice of your right to rescind, outlining how to exercise it during the three-day window. If you don’t get this notice or the details of the notice you did get were wrong, you might have up to three years to exercise your right to rescind. For this, you may want to talk to an attorney to make sure you have a strong legal case.
Your lender has up to 20 days to observe your rescission and give you a full refund on any money that was paid up until that point.
Pros and Cons of the Right of Rescission
Gives you the option to back out of a home loan contract
Not applicable to all types of home loans or situations
The right of rescission helps you back out of a home equity loan, HELOC, or new refinanced mortgage agreement with a new lender. However, it is not applicable to new mortgages used to finance the purchase of a home.
You also do not have the right of rescission when you refinance or consolidate your mortgage with your current lender unless the new amount financed is more than the unpaid principal balance. If a state agency is the creditor, you also do not have the right to rescind. It also does not apply to the renewal of optional insurance premiums.
There are also special rules for foreclosures—you’ll have the right to rescind if a mortgage broker fee that should have been included in the finance charge was left out or if the creditor did not provide the properly completed appropriate model form or very similar notice of rescission.
- When you get approved for a home equity loan or home equity line of credit (HELOC), or you refinance your home loan with a different lender, you have the right of rescission on your loan.
- The right of rescission is used when you want to cancel some types of loans without facing penalties or fees. This option isn’t available for new home purchases.
- You have up to three days from signing your contract to exercise your right to rescind. You can use the information provided by your lender’s Truth in Lending Act (TILA) disclosure form, given to you at closing.
- If you didn’t receive the TILA disclosure, you could have the right of rescission for up to three years after completing your agreement.
- Your lender has up to 20 days to refund you any money you paid before exercising your right of rescission.