Right of rescission: What it means and when it applies

If a buyer decides that a refinance isn’t the best course of action for their situation, they have a window of opportunity to cancel the refinance contract. It’s called the right of rescission, and it can help people who change their minds about certain types of transactions. But it’s only available for a limited time in the process. 

Read on to learn more about the right of rescission and how to exercise your right to rescind.

What is the right of rescission?

The right of rescission refers to a homeowner’s right to cancel a mortgage refinance, home equity loan, home equity line of credit (HELOC) or reverse mortgage without penalty. You can’t cancel a mortgage contract on a home purchase.

The right to rescind period lasts 3 business days and doesn’t start until the promissory note is signed and you receive a Truth in Lending disclosure and two copies explaining your right to rescind. It’s a guaranteed right under federal law, no matter the borrower’s reason to cancel the loan. The lender cannot require an explanation.

How the right of rescission works

The right of rescission was established by the Truth in Lending Act (TILA) under the U.S. Federal Law. TILA, also known as Regulation Z, was established in 1968 to protect consumers when dealing with lenders and creditors. 

Your right to rescind will last 3 business days from the date you sign your promissory note, which is a legal agreement that you will repay the loan by its maturity date. Along with signing the promissory note, you should also receive a Truth in Lending disclosure and two copies of documents explaining your right to rescind.

Day 1 of the 3-day right of rescission period is the first business day after you receive these documents and sign the promissory note. Keep in mind that the time starts once the last of these events happen. 

If, for example, you’ve signed the promissory note and received the documents explaining your right to rescind, but haven’t gotten the Truth in Lending disclosure, your 3-day period won’t start until you receive the disclosure.

Keep in mind that not all days are business days. Sundays and legal public holidays are not considered business days. However, Saturdays are considered business days.

If you do not receive your Truth in Lending disclosure or the notice of your right to rescind, or if they aren’t correct, you have up to 3 years to rescind your loan from the date of closing.

When Does The 3-Day Right Of Rescission Start?

Before your right of rescission period officially begins, three things must happen:

• You’ve signed your mortgage promissory note.
• You’ve received your Closing Disclosure.
• Your lender has given you two copies of a notice explaining your right to rescind.

When Does Your Right To Rescind End?

Your right of rescission comes to an end at midnight of the third business day. Business days include Saturdays, but not Sundays or federal holidays.

For example, John received his documents and signed his promissory note on Monday, March 10. The first day of his 3-day period starts Tuesday, March 11. That means John has until midnight on Thursday, March 13 to cancel his loan. 

Here’s another example of someone rescinding their loan when there is a non-business day in a 3-day period.

Larry received his documents and signed his promissory note on Thursday, June 10. His first day in his 3-day period is Friday, June 11 and his second day is Saturday, June 12. Since Sunday is not considered a business day, his third and final day to rescind is Monday, June 14. Larry has the right to rescind until midnight on Monday, June 14. 

Here’s another example of someone rescinding their loan when there are multiple, non-business days between their 3-day period.

Sarah received her documents and signed her promissory note on Friday, December 31. Since the next day is New Year’s Day, a legal public holiday, and the day after that is a Sunday, the first day of her 3-day period starts on Monday, January 3. She has until midnight on Wednesday, January 5 to cancel the loan.

Exercising your right of rescission

To exercise your right to rescind a mortgage contract, it must be done in writing and mailed or delivered before the 3-day window closes. You may use the form provided to you by the lender or write a letter expressing your desire to rescind.

Make sure to make a copy of the form or letter and any other evidence of your rescission. That may include confirmation of the delivery of the form, confirmation that it was mailed on time and any other correspondence with your lender.

Once you’ve exercised your right, the lender has 20 days to refund all the fees it charged and relinquish its claim on the property.

When does right of rescission apply?

You may exercise your right of rescission for:

• Mortgage refinances with a different lender
• Home equity loans
• Home equity lines of credit
• Reverse mortgages

However, there are certain instances where the right of rescission doesn’t apply, including:

• New home purchase mortgages
• Secondary homes
• Investment properties

Right of rescission exceptions

There are exceptions to the right of rescission:

The right of rescission can apply to a cash-out refinance with your current lender to amounts exceeding your outstanding balance. This means you can only cancel the cash-out portion of the transaction.

You can apply your right of rescission to a bridge loan being used to purchase another home.

The bottom line

The right of rescission means that you can withdraw from a refinance with 3 days of signing a promissory note and receiving the required documents. A refinance can be a big financial commitment, so it’s important to know that you have the opportunity to change your mind. If you’ve just signed the promissory note and received the documents and are having second thoughts, it’s important that you act fast as you have a 3-day window period from signing and receiving the documents.

If you’re ready to refinance your home, start a refinance application today!