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Right of rescission lets you back out of some loans

Federal law gives you a cooling-off period when you get a home equity loan or line of credit, or when you refinance with another lender.

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It is called the right of rescission. It allows you to rescind, or cancel, some types of home loans and walk away without losing money.

The right of rescission provides a three-day period when you can back out of the loan before you get the borrowed money, no questions asked. Within 20 days, the lender must give up its claim to your property as collateral and must refund any fees you paid.

A law called the Truth in Lending Act, which is designed to shield borrowers from unscrupulous lenders, grants the right of rescission. The law is intended to thwart smooth-talking loan officers who try to fleece elderly or unsophisticated borrowers out of their money and even their homes.

The law also protects consumers from themselves. The homeowner who takes out a home equity line of credit to buy a car, then thinks it over for a couple of days and decides that such financing would be a bad move, can rescind the loan. Likewise for the homeowner who takes out a home equity loan, then finds a better deal a day or two later. The homeowner can rescind the first deal within three business days and take the second.

Right doesn't apply to all loans
The right of rescission is not available for all mortgages. Most importantly, there is no right of rescission for a mortgage made to buy a house. Borrowers and lenders can get tangled up in whether a mortgage is a purchase loan. Take, for example, the way financing is set up for many built-to-order houses. You get a short-term construction loan while the house is being built; then, after the house is finished, you pay off the construction loan with a permanent mortgage. You don't have a right of rescission with either loan because both are considered purchase money.

The right of rescission also is not available when you refinance your loan with the same lender, when the house in question is not your primary residence (in other words, if it's your vacation home or an investment property), if you borrow the money for your business, or if you're borrowing from a state agency.

That leaves a lot of situations where you do have the right of rescission: when you refinance your mortgage with another lender and when you take out a home equity loan or line of credit (unless it's part of a "piggyback loan" designed to avoid paying mortgage insurance).

Cash-out refi rules
Things get complicated if you do a "cash-out refi" -- refinancing for more than you owe on your current mortgage, and taking the difference in cash. If you do a cash-out refi with the same lender, you have the right to rescind only the cash-out portion; if you do a cash-out refi with a different lender, the entire amount can be rescinded.

It doesn't matter what kind of home you have: if it's a single-family house, a condominium, a floating home or a manufactured home permanently anchored to land you own, you have the right of rescission.

A borrower must exercise the right of rescission within three business days of signing the loan papers, receiving all the loan disclosures, and getting a copy of the notice that there is a right of rescission. Usually, all three of those requirements are met on the same day; if they aren't, the clock starts ticking only after all three conditions have been satisfied.

When the clock ticks ...
That clock ticks only on business days. Much has been written by federal regulators about what counts as a business day. In general, every day is a business day except Sundays and federal holidays. Saturday counts as a business day, even if the lender's office is closed on Saturdays. The right of rescission expires at midnight concluding the third full business day after the papers are signed and all other conditions are met. So, for example, if you close a home equity loan on Thursday, the clock starts ticking Friday, continues to tick on Saturday, stops on Sunday and resumes on Monday. The right of rescission ends Monday at midnight.

To exercise your right of rescission, you must inform the lender in writing -- a phone call won't do. The letter doesn't have to be postmarked by the deadline -- you merely have to drop it in a mailbox by the deadline. That means that if your right of rescission ends at midnight Saturday night, and you mail the letter just before the deadline, and Monday is a federal holiday so the letter isn't postmarked until Tuesday, you still have rescinded the loan.

Not surprisingly, the loan officer might call after the rescission period has ended, just to ask if you're still going ahead with the loan.

It is possible to waive the right of rescission so you can get the money immediately, but only in emergencies. To stay out of trouble with regulators, your lender is unlikely to let you waive the right of rescission unless the loan officer is convinced that you truly have an emergency and you're not simply impatient. Examples of acceptable emergencies: your roof has blown off in a storm and you need a home equity loan right now to pay for a repair, or you need the money immediately to pay for a medical procedure.

 

 

 

 
-- Posted: Feb. 12, 2004
   

 

 
 

 

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