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Borrowing money on your home through a home equity loan or a line of credit is a big decision.  That’s why the Truth in Lending Act gives borrowers a chance to change their minds on most types of home equity loans.  This is called the right of rescission, and it allows a borrower to rescind, or cancel, certain loans for up to three days after the paperwork has been signed.

The right of rescission doesn’t apply to all home loans.  For example, there is no right of rescission on a mortgage to buy a house.  Also, there is no right of rescission when you refinance your loan with the same lender (unless you will take cash out over and above paying off the previous mortgage), or when the house is not your primary home (such as a vacation home).  The right of rescission does apply when you refinance your home (either in a home equity loan, or a second mortgage) with a lender other than the one who holds the first mortgage on your house.

Click here to listen to "The Right of Rescission"With loans that refinance for more than your current mortgage, then pay off the original loan and take the difference in cash (a “cash-out refi”), there is a right of rescission on the entire amount if it is done with a different lender other than the one who hold the first mortgage.  If you do a “cash-out refi” with the original lender then you may only rescind the cash-out portion (that is, the extra loan amount you’re taking in cash).

The right of rescission is good for three business days, starting the day after you close on a loan.  Saturday is counted as a business day, whether or not the lender is open on Saturdays.  Sunday is never counted as a business day, nor are Federal holidays.  So, for example, if you close a loan on a Friday, Saturday would be the first business day, Monday the second business day, and Tuesday the third business day.  You have until midnight on the third day (in our example, Tuesday) to cancel the loan.

To rescind, or cancel your loan you must notify the lender in writing.  It doesn’t have to necessarily be postmarked by midnight on the third day, but it must have been dropped in the mailbox by the deadline.

The right of rescission is designed to protect homeowners from dishonest lenders who may be trying to pressure or rush them into a loan.  The right of rescission also allows borrowers a little time to think it over, after they’ve taken out a home equity loan and change their mind.