What is the right of rescission for home loans?

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If you change your mind about a mortgage refinance, you may be able to cancel your loan contract. Learn what the right of rescission is and how it works. (Shutterstock)

If you get a mortgage refinance loan but you’re rethinking your decision, you have a legal right to cancel your loan contract within three days. The right of rescission allows you to cancel, or rescind, certain kinds of home loans within that time frame and get your money back.

Understanding what the right of rescission is and how it works will help you think through your decision carefully and back out if need be.

It’s important to feel confident about the refinance lender you choose. Comparing rates from multiple lenders can help you make the best decision for your situation. If you’re interested in refinancing your mortgage, visit Credible to learn more and see your prequalified mortgage refinance rates.

What’s the right of rescission?
How does the right of rescission work?
What home loans can a right of rescission apply to?
How do you exercise the right of rescission?

What’s the right of rescission?

The right of rescission is a provision of the federal Truth in Lending Act (TILA), and it gives borrowers the legal right to cancel certain types of home loans with a new lender within three days of closing — no questions asked. The right of rescission was created to protect consumers by giving them the opportunity to change their minds.

How does the right of rescission work?

You can cancel certain types of home loan contracts for any reason — for example, if you decide you don’t want to take on additional loan payments or you were able to find a better loan offer after going through the closing process.

Whatever the reason may be, you’ll need to cancel your loan contract within the legal timeline and once you receive certain documents (more on this below).

You can notify the lender by using a form provided to you — it may come with documentation sent to you before the loan closing — or you can write a letter stating your request.

The important thing to remember is that the letter needs to be delivered before the deadline stated in your closing documents. It’s a smart idea to keep a copy of the written request and any documentation confirming that you mailed the letter and it was delivered on time.

Knowing how much a loan might cost you can help you decide if you want to refinance your mortgage. Credible lets you compare mortgage refinance rates from various lenders, without affecting your credit score.

When does the right of rescission period begin and end?

The right of rescission period is three business days once the following events occur (usually when the loan is closed):

You sign your home loan contract or promissory note.
You receive a closing disclosure statement, also called the TILA disclosure document.
You receive two copies of a notice stating your right as a consumer to rescind the loan agreement.

Day one is the first business day after you receive copies of the last notices. You’ll then have until midnight on the third business day to rescind. That means if one of those days falls on a Sunday or legal public holiday, these days don’t count. However, Saturdays do count as a business day under the TILA.

For example, if you receive your last notice explaining your right to rescind on a Friday, you’ll have until the following Tuesday at midnight to submit your cancellation request.

If your lender fails to provide you with the Truth in Lending Act disclosure or any notices of your right to rescind, or if you get them but they’re wrong, you may get up to three years from your closing date to rescind the loan. In this situation, it’s a good idea to seek legal counsel.

What home loans can a right of rescission apply to?

The following types of home loans have a right of rescission:

Home equity loans
Home equity lines of credit, or HELOCs
Home refinancing loans
Some reverse mortgages

You won’t be able to cancel a contract for a mortgage tied to a new home purchase. Plus, the right of rescission has some additional restrictions, such as refinancing with the same lender. In this case, you can only use your right to rescind for the new loan amount that’s above the original principal amount.

Other limitations include refinancing or taking out a home equity loan or HELOC for a property that’s not your principal residence — an investment property or second home you live in for part of the year, for example. You also won’t be able to exercise your right to rescind if you’re renewing optional insurance premiums or if your lender is a state agency.

How do you exercise the right of rescission?

If you’ve made the decision to cancel your loan contact, here’s how to exercise the right of rescission:

Check that you’ve received the right to rescind notices from your lender.
Follow the lender’s directions by either mailing in the provided form or by writing a letter with your request.
Clearly state that you want to cancel the contract, the date you made the request, and relevant information such as the loan number.
Send the request to the address your lender provided, or the address where you were instructed to send your monthly payments, within the three-business-day deadline.
Keep documentation or proof that you mailed the request to your lender.

Although you can rescind your loan contract for any reason, it makes the most sense if you’ve found a significantly better rate elsewhere or you can no longer afford the loan. You should expect a refund within 20 days of any costs you’ve paid for the loan. You can keep any funds or property received during the closing, but once the lender gives you a refund you’ll need to return it.

If refinancing is the right financial move for you, Credible lets you easily compare mortgage refinance rates from various lenders in minutes.

Will exercising the right of rescission affect your credit?

Since you’re not taking out a new loan when you exercise the right of rescission, there’s technically nothing for the creditors to report, so it won’t affect your credit. The only activity the creditor will report is the hard inquiry for your original loan application.

If you decide to apply for a new loan shortly after you rescind your original one, your credit reports may show that you have more than one hard credit inquiry for your loan applications, which could have a negative effect on your credit.