Advanced Personal Finance

There’s a way for a person feeling ‘borrower’s remorse’ to back out of certain home loans. It’s called the right of rescission and you can exercise it on home equity loans, HELOCs, some home refinancings.

The right of rescission gives you three business days to reconsider whether or not you want to take delivery of the money from a loan. If you change your mind in that time, you’re off the hook for loan. You also are entitled to the return of any fees you paid to originate the loan.

Not surprisingly, there are lots of details on exercising the right of rescission. There are timing rules, rules on which types of loans it applies to, and rules on exactly how to do it.

What’s a ‘business day?’

The three day clock starts the day after you ‘close’ the loan. Three stipulations must be met for the clock to start:

• You sign all the loan papers

• You receive all the loan disclosures

• You get a copy of the notice of right of rescission

Usually, all the stipulations are met at loan closing. The clock starts, then, the next business day. Importantly, a ‘business day’ is any day that’s not a Sunday or federal holiday. Saturday counts as a business day, even if the lender isn’t open for business that day.

For example, you sign and receive all the papers Thursday August 30, 2007. The clock starts Friday morning, goes through Saturday, stops for Sunday and Labor Day, and resumes Monday.

Only applies to certain loans

The right of rescission only applies to home equity loans, lines of credit, and refinances with a different lender. You can’t use it on non-primary houses, refinances with your current lender, or when you first take out a mortgage to buy the house.

Things get complicated when you do construction loans and piggyback loans. I’m not a loan officer, so I’m not going to get into those situations.

When you do a ‘cash-out’ refinance, even with your current lender, you can always exercise your right of rescission for the cash out piece. Of course, if the refinance is with a different lender, you can back out of the whole thing.

Exactly how to do it

You have to notify the lender in writing - a phone call won’t do. Interestingly, you only have to get the letter in the mail by the three day cut-off. It doesn’t have to be postmarked by that day. I wouldn’t try backing out of a loan based on that technicality though. If you’re going to do this, I’d make sure the letter got a postmark.

Since this letter must get to the right place, make sure you have a good address for the lender and the right department at closing. If multiple parties took out the loan (e.g. husband and wife), they all must sign the rescission letter.

So the next time you take out a home equity loan for that new car and then realize you’ll be paying on it for ten years and reconsider, keep this post on hand. Seriously, though, if you sign for a loan and later read some evil clause in the inch-thick packet of papers you got at closing, this might come in handy.

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This entry was posted on Monday, August 27th, 2007 at 10:06 am and is filed under Credit, Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.