Right of rescission

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

What is right of rescission?

Right of rescission is a federal law and a part of the Truth in Lending Act that gives borrowers the right to cancel a financial transaction when refinancing a home, obtaining a home equity loan or obtaining a home equity line of credit.

Under the law, borrowers have until midnight on the third business day after the documents are signed to cancel the financial contract. For the purposes of rescission, Saturday is considered a business day but Sunday is not. Legal holidays are also not considered business days.

Deeper definition

The right of recession was enacted to give consumers protection from predatory lenders. The law gives borrowers a period of time to reconsider whether the financial transaction is in their best interest.

While this law applies to refinancing mortgages, home equity loan and home equity lines of credit (HELOC), it does not apply to home loans, refinancing mortgages with the borrower’s current lender, refinancing with state agency mortgages or mortgages on a second home or investment property.

Under the Truth in Lending Act, lenders are required to notify borrowers of their right to rescind and provide borrowers with a procedure to follow if borrowers choose to rescind a transaction.

Right of rescission example

Stacy and Frank decided to take out a home equity loan and use the money to pay off bills. After they signed the paperwork and went home, they did some research and realized the interest rate on the loan was far higher than what other lenders in the area were charging.

After reviewing their options, Stacy and Frank decided the loan was not in their best interest. The lender had provided them with a notice of their right of rescission and included the procedures they wanted Stacy and Frank to follow if they changed their minds about the loan.

The following business day, the couple followed the procedures and notified the lender in writing that they were exercising their right to rescind on the loan. The loan was terminated, and Stacy and Frank were not liable in any way.

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