You need to understand what rescission is. Here’s what to know.

What is rescission?

Rescission is the act of canceling a contract and returning both parties to the status they held before they entered the agreement. The right of rescission is a right given to certain borrowers under the Truth in Lending Act.

Deeper definition

According to the Truth in Lending Act, borrowers applying to refinance a mortgage with a new lender and those applying for a home equity loan have up to three days to rescind the mortgage contract. This right does not apply to borrowers looking to refinance with their current mortgage holder or those who need a new mortgage.

The right of rescission protects borrowers from high-pressure sales tactics used by unscrupulous lenders and contractors. It gives the borrower time to compare loan terms and rates as well as the total cost of borrowing money versus using cash.

As a result, lenders must give borrowers a promissory note, a Truth in Lending disclosure that details payments, fees, other mortgage-related costs, and two copies of the right to rescind notice.

In fact, the three-day rescission period does not start until the lender provides all of these items to the borrower, and failing to meet this requirement extends the rescission period to three years.

Borrowers who want to rescind a contract should follow the instructions provided by the lender in the right to rescind document. They should keep proof that they gave the lender the necessary documents and sent them within the required time period.

Rescission example

Before agreeing to a loan, borrowers should carefully consider whether they will be able to make the required payments and whether the loan makes sense for their situation.

For example, if you need $10,000 to replace the roof on your house, you may consider using a line of credit to pay for the project. While you wait for the lender to give you the money, you may decide to use money from savings to pay for the new roof. Then, you can cancel the line of credit.

Find a loan that matches your goals so you don’t have to exercise your right of rescission. Compare the rates of multiple lenders to see what they have to offer.

More From Bankrate