Refinancing a home loan works slightly differently than a home purchase. The main difference is your right to cancel the loan. This is called the right of rescission. When you buy a home, you do not have this right. When you refinance, however, you do have the option. You can cancel the loan within the first three business days after the closing. The deadline is midnight on the third business day.
The Details of the Right of Rescission
The right of rescission period does not start until three things happen. You must sign and date the mortgage note. You must receive a copy of the Truth-in-Lending document. Finally, you must receive two copies of your right to rescind.
The countdown begins the first business day following the date of your closing. This means the day you close does not count as the first day. You start day one on any day except Sunday. In fact, Sunday never counts in the three-day period. For example, if you close on Thursday, your first day is Friday. You then have Saturday, Sunday, and Monday to think about the loan. You can cancel all the way up until midnight on Monday.
How to Exercise Your Right to Rescind
If you decide you wish to rescind your loan, you must make it official. Your Right to Rescind documents will tell you who you need to contact. You will have to make the cancellation formal by putting it in writing. You do not have to deliver the letter in person in most cases. You can usually just drop it in the mail, although a phone call could help stop the process sooner. You should always have proof of when you sent the letter or document to rescind your loan. For example, you could send it Priority Mail through the post office or via Fed Ex. They both provide proof of the time and date you sent the letter.
Why People Rescind
Many people wonder what would make someone rescind in the first place. You are the one who applied for the loan, so why cancel? The answer is simple. Sometimes borrowers do not realize the full implication of the loan. It is not until they receive the closing papers and go through them that reality hits. At this point, they already closed on the loan. If there were no right of rescission, the borrowers would be stuck in the loan. Luckily, there is the opportunity to get out of the loan if you do not want it.
Why Banks Offer Rescission
Banks offer the right to rescind in order to protect the consumer. For example, if a borrower took a loan they could not afford, they put their home at risk. Sometimes borrowers do not realize the full cost of the loan or how long the term is until it is too late. The rescission period gives borrowers time to think everything through. They do not have to make any rash decisions or feel pressured to close on a loan they don’t want. Instead, they can mull it over and cancel the loan on their own time.
No Reason Necessary
The nice thing about the right of rescission is you don’t need a reason. This would make it more difficult to cancel a loan if you needed a reason. Think about calling your loan officer and canceling the loan. If you had a reason to cancel, he could come up with numerous reasons why you shouldn’t. You might end up changing your mind because you feel pressured. This is why you mail a letter and let the process happen naturally. In some cases, you don’t even mail the letter to the lender. Instead, it goes to the closing agent who notifies the lender. This takes the pressure off you completely. By the time everyone is informed, the loan is canceled.
Loans You Cannot Rescind
There are certain loans you cannot rescind. The obvious loans are those used to purchase a home. Once you close on these loans, you own the home. The only way out is to pay the mortgage off. Refinance loans, on the other hand, have the right to rescind. The exceptions to this rule include:
- Loans used to purchase a second home or investment property
- Refinance loans on a second home or investment property
- Commercial loans
The only loans you can rescind are refinance loans on a primary home.
The one thing the right of rescission ensures is uniformity. Any lender must provide you with the documents required by law, including the Truth-in-Lending. This document contains your APR or annual percentage rate and is what makes people rethink their decision. When they see how much their loan costs them, it makes them wonder if the refinance was worth it. If a lender neglects to provide you with this document or the right to rescind document, there is no countdown clock. You are free to rescind as you please if the lender did not follow the letter of the law.
The right of rescission is a way to protect you. Even if you think you understand the loan you obtained, take the time to go over the papers. You never know when the closing papers might disclose something you did not know. Just knowing you have the option to cancel can help you enter the process with confidence.