Understanding the Right of Rescission in Mortgage Agreements

When you’re refinancing your home mortgage or weighing a home equity loan, you should be aware of a protective clause you can use if you change your mind. It’s called the “right of rescission,” and it allows you to reverse your decision within three days. Before you decide to borrow money from a lender using your home as collateral, get to know how the right of rescission works and what experts have to say about it.

What is the right of rescission?

The right of rescission is a consumer protection included in the Truth in Lending Act (TILA) of 1968. It’s designed for transparency and requires lenders to disclose information about charges and fees associated with certain loans so that consumers can evaluate the terms. It also provides sufficient time for consumers to make a decision.

The right of rescission allows you to officially cancel the transaction you previously signed. It gives consumers three days to back out of certain loans, but it doesn’t apply to home purchase loans.

“It’s a measure to prevent borrowers from making rushed financial decisions that could jeopardize their homes,” says Steven Glick, director of mortgage sales at HomeAbroad.

This provision ensures that homeowners can back out of the loan without penalty if they feel it’s not in their best interest, says Joy Aumann, CIPS, founder of LuxurySoCalRealty. “It provides them time to review the loan terms and avoid any potentially harmful financial commitments.”

How does the right of rescission work?

After going through the closing process on a home refinance or home line of credit transaction, the borrower might decide to use the right of rescission afforded by TILA to reverse the loan terms. One reason they might do this is if they are refinancing after bankruptcy and want to improve their finances to try to secure a better rate.

You can write a letter or use a form provided by the lender to cancel the agreement. Track the letter with postal or other signature letter tracking services to ensure it is delivered to the lender by that third day. 

Which transactions are subject to the right of rescission?

Home equity loan transactions are subject to the right of rescission.

HELOCs are covered under the right of rescission, meaning you can cancel within three business days of signing. 

If you’re refinancing a mortgage, you can also apply right of rescission mortgage terms to cancel the transaction within three days.

What are the exceptions to the right of rescission?

There are some exceptions to the right of rescission to note. These include:

• Home purchase mortgages
• Refinancing with the same lender if no new funds are borrowed
• Loans secured by vacation homes or investment properties
• Certain state agency loans
• Loans from government programs, including FHA and VA loans

“Additionally, refinances that don’t result in borrowing extra money from a different lender may not be subject to rescission,” Aumann says. “These transactions are seen as lower-risk by regulators.”

How to exercise your right of rescission

If you change your mind about using your home as collateral, or you want to stop the refinancing process with that lender, putting the right of rescission TILA into action right away is crucial.

Tell the lender, your lawyer, and any other members of the loan team right away that you plan to rescind. Send the letter out as soon as possible and consider including a package tracking number in the email so the lender knows this is on its way in time.

If you believe you have a right to rescind but the lender says you don’t qualify, take action by requesting a written explanation from the lender, consulting with an experienced real estate attorney, and consider filing a complaint with the Consumer Protection Financial Bureau if you suspect there’s a violation, Glick suggests.