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Refinance interest rates continue to remain incredibly low, making it more tempting than ever for homeowners to refinance their mortgages. Before taking the next step, however, it’s important to understand the ins and outs of refinancing, including how to stop the process if necessary. Although rare, people seeking a refinancing of their home mortgage can back out of it, even after signing and submitting the documents. This is called the right of rescission.
“In its simplest form, the right to rescind is the ability for a borrower to change their mind on a refinance,” says Michael Piazza, originating branch manager at lender CrossCountry Mortgage, located in Danbury, Conn. “It gives them an opportunity to review the documents, then decide that if it doesn’t meet their financial needs, they can cancel the refinance. It allows consumers to not have a financial penalty and carry on with their current mortgage in place.”
The right of rescission does not apply to mortgages for purchasing a property, nor does it apply to second homes, investment properties, or other business transactions. But it’s important to know about this option as you embark on potentially refinancing your current home mortgage.
What Is the Right to Rescind?
“The right of rescission wasn’t created that long ago,” says Paul Green, portfolio manager at Harbourfront Wealth Management and owner of Green Private Wealth Counsel in Woodstock, Ontario. “Eleven years ago, the Dodd-Frank Wall Street Reform Act expanded the Truth in Lending Act to provide borrowers with the right to cancel some, not all, types of mortgages.” This was an added layer of protection in the Truth in Lending Act, also known as Regulation Z, which aids consumers by regulating the information and disclosures that a mortgage company or other lender must provide.
This relatively new right allows consumers to cancel mortgage refinances, no questions asked. But there is one requirement: The right of rescission must be invoked within three days after the papers are signed.
The right of rescission can provide peace of mind for anyone taking on a refinance transaction, but according to Piazza, it’s not often invoked. During his decades-long career working with mortgages, he says he’s only seen three rescissions. The reason doesn’t have to be cold feet, either. A homeowner can simply make a different decision. One borrower Piazza worked with exercised their right of rescission after deciding to sell their home instead of refinancing the mortgage.
Although the right of rescission may provide peace of mind if you’re pursuing a refinance of your mortgage, it’s best to determine whether a transaction isn’t to your benefit as early as possible in the process.
Typically, however, the right of rescission was created to help consumers avoid bad transactions.
“It gives borrowers a chance to change their mind, and it gives them the second or third opportunity to re-review everything they’ve signed throughout the process to make sure doing the refinancing makes sense for them,” says Piazza. “There are unscrupulous mortgage people out there that sell people on the idea that a refinancing is great for them when it doesn’t actually help them at all.”
How to Exercise the Right of Rescission
Once a transaction is consummated—meaning the papers are signed and the loan is closed—the clock starts ticking. Mortgagees now have three business days to exercise their right of rescission. Typically, a rescission form is included with the closing documents, as required by the Truth in Lending Act. An individual who wishes to cancel the transaction would fill out the form, sign it, and send it to the bank attorney on the transaction. The attorney would then send it to the lender, who cancels the funding of the loan.
As with all major financial moves, keeping good records is essential. “It is best to keep a copy of the dated letter in case you find your lender is uncooperative or there is an issue with the postal service,” says Green. “This way you have proof that contact was initiated within the rescission period. Ensure that you also receive confirmation from the lender that your letter has been received. Once confirmed, the lender has a total of 20 days to refund all fees.”
How to Calculate the Three-Day Right of Rescission Period
As previously mentioned, the three-day countdown timer starts once the papers have been signed and a loan is closed. But the law is somewhat lenient with the timing to accommodate people who may have signed their documents later in the day.
“The right [of rescission] remains in effect until midnight of the third business day following consummation, or delivery of all material disclosures regarding the loan, whichever occurs last,” says Richard Ortoli, co-founder of New York law firm Ortoli Rosenstadt LLP and head of the firm’s real estate and international practices. “If the disclosures are inaccurate, the right to rescind may be extended for up to three years.”
Here’s what this looks like in practice: Let’s say you sign your papers on Monday at 3 p.m. The first day for the right of rescission would be Tuesday, the second day would be Wednesday, and the third and final day would be Thursday. You would have until Thursday at 11:59 p.m. to exercise the right to rescind the transaction. Sunday and federal holidays are not included in the count, but Saturdays are, according to Green.
Of course, going back on your original decision and canceling your mortgage refinance does mean that it’s canceled—for good. “Though retailers like Amazon, Target, and Walmart are offering returns and allowing consumers to keep products, that unfortunately is not the case here,” he says. “Urgency is of utmost importance.”
The right to rescission applies to the refinancing of home mortgages, and allows consumers to cancel the transaction even after signing and submitting the paperwork in case they find the terms are not as good as they once thought or they simply want to go in a different direction. Keep this in mind when you’re considering refinancing, but remember that mortgagees are only given three full business days to invoke their right to rescind the transaction.