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The right of rescission is a legal right that allows consumers to cancel certain types of home loans, such as a refinance, home equity loan, home equity line of credit (HELOC) and even some reverse mortgages. It gives you three days to rescind an agreement and get your money back.
Understanding how the right of rescission works can help you make sure you're not being taken advantage of and can give you some time to rethink your decision if need be.
What Loans Have a Right of Rescission?
The right of rescission applies only to certain types of home loans: home refinancing, home equity loans, home equity lines of credit (HELOCs) and some reverse mortgages. You can't, for instance, cancel a contract on a new home purchase.
That said, there are some limitations with the right of rescission to keep in mind. If you're refinancing your mortgage loan with the same lender, for example, you can only exercise it on the portion of the new loan that's higher than the original principal amount.
It also doesn't apply if you're refinancing or getting a HELOC or home equity loan for a property other than your principal residence, such as a home you rent to tenants or only live in for a portion of the year.
Finally, you can't exercise your right of rescission on loans where the lender is a state agency or if you're renewing optional insurance premiums.
When Does the Right of Rescission Period Start and End?
The right of rescission period is three days long and begins once three things occur—typically all at the time the loan closes:
- You've signed the promissory note.
- You've received the Truth in Lending Act (TILA) disclosure document, also called the closing disclosure.
- You've received two copies of a notice that states your right to rescind the agreement.
Once the clock starts, you have until midnight three business days later to cancel the contract. The TILA dictates that Saturdays are considered business days, but Sundays and holidays aren't.
So, if you were to close on a mortgage refinance on the Friday before Presidents Day, you would have until the end of the following Wednesday to submit your request.
How to Exercise the Right of Rescission
You're not required to provide a reason when you submit your request to rescind your contract, but it may be worth considering in a few different situations:
- Your financial situation has changed such that you're no longer able to afford the loan.
- You've found a better deal from another lender.
- You've simply changed your mind.
If you've decided to cancel your contract, contact the lender right away to avoid missing your rescission deadline. There's no standard practice for this process, but lenders are required by law to disclose how it can be done.
The lender is also required to provide an address to which requests can be sent, but if an address wasn't provided, you can simply send the form to the address provided for monthly payments. The request is considered submitted at the time it's sent, so be sure to retain proof that it was mailed or otherwise communicated to the lender within the three-day window.
Once you've submitted your request to rescind the contract, the lender is required to provide a refund of any costs you incurred within 20 days. If you received money or property in the transaction, you can hold on to it until the refund has been provided, but you'll need to return it after that occurs.
How Does the Right of Rescission Affect Credit?
Exercising your right of rescission doesn't impact your credit at all or even your odds of getting another loan in the future. It's not something that lenders can report to the credit bureaus.
That said, if you're canceling the contract because you want to apply for a loan with another lender, it's important to note that your credit reports will show the inquiries for both loan applications, and having multiple inquiries in a short period not related to rate shopping could negatively impact your credit score.
Make Sure You're Credit-Ready for a Home Loan
Before you apply for a home loan, refinance, HELOC or any other loan, it's important to make sure your credit is in good shape. These loans are significant financial commitments, and an interest rate that's just slightly higher than what it could have been can cost you thousands or even tens of thousands of dollars over the life of your new loan.
As a result, it's a good idea to work on building your credit before you submit an application for a home loan of any kind. Start by checking your credit reports from all three credit bureaus, which you can do for free through AnnualCreditReport.com. It's also key that you check your credit score to see where you stand and take action if there are areas you can address to potentially lift your score. That can include paying down credit card balances, disputing inaccurate credit information and more.
This process of improving your credit can take some time, but the long-term savings are well worth it.