Have you ever been told a piece of paper said one thing, only to realize after you signed that it actually said something else? It’s never a good situation, especially when money’s involved. Fortunately, the Truth in Lending Act (TILA), passed in 1968, provides several protections to borrowers. One protection under the TILA is the right of rescission. The right to rescind an agreement and receive all funds back, no questions asked, was developed to protect consumers entering certain contracts.
What Is Right of Rescission?
The right of rescission provides that after signing a mortgage refinance, home equity loan or home equity line of credit contract, the borrower can cancel the loan — so long as he does so within three business days.
Right of Rescission – The Fine Print
Lenders are required to provide borrowers with disclosures including a notice of rescission. By law, you should receive two copies of the notice of the right to rescind. The notice should identify the transaction as well as clearly and conspicuously disclose how to rescind as well as the date the rescission period expires.
Once you have received the loan disclosure documents and closed on the loan you will have three business days to back out of the loan if you change your mind. The clock begins at midnight the night that you close on the loan or when you get the loan disclosure documents, whichever is later. Business days as defined for the right of rescission are all days, excluding Sundays and legal holidays.
Let’s say you close on a loan to refinance your mortgage on a Tuesday at 3:00 p.m. You receive the loan disclosure documents at the same time as the closing. Then you will have until 11:59 p.m. on Friday to use your right to rescission.
If you chose to exercise your right of rescission, the written notice must be sent to the lender within the three-day time period. However, the lender does not have to receive the notice within the three days. It’s ideal to send the notice by certified mail or fax. That way, there’s proof of when you sent it.
Once the right to rescission has been invoked the lender must refund any fees associated with loan within 20 days.
What the Right of Rescission Covers
The right of rescission does not apply to all mortgage loans. It only applies to the following:
- Refinancing for primary residences when doing so with a new lender
- Home equity loan
- Home equity line of credit
- Cash-out refinance, but right of rescission only applies to the cash-out amount
What the Right of Rescission Doesn’t Cover
The right of rescission is not available for other types of mortgage loans including:
- Purchase of a new home
- Refinancing with the current lender
- Refinancing of a vacation or investment property
How to Exercise Your Right of Rescission
As part of the required loan disclosure documents, the lender should have given the borrower a notice of the right of rescission. By law, this notice must include how to exercise the right of rescission, a form to do so and the address of where the form should be sent. Simply fill out the form and send it within the required time frame to exercise your right to rescission.
If the required disclosure documents were never provided, then instead of three days, you have three years to rescind. You can do so using a simple letter stating intent to rescind.
Remember, if you change your mind about refinancing with a new lender, a home equity loan or a home equity line of credit, you can back out. You have three days to let the lender know and you will be refunded any fees paid. Simply fill out the notice included in the loan disclosure documents. Send them to the lender within the three-day time period, and you should on your way to a fee refund.
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