Can you cancel your home equity loan?
A home equity loan, also called home equity loan, home equity installment loan, or second mortgage, is a type of consumer debt. Home equity loans allow homeowners to borrow against the equity in their home. This type of loan is relatively easy to set up because it is a secured debt. When you apply, your chosen lender performs a credit check and orders an appraisal of your home to determine your creditworthiness and combined loan-to-value ratio. They will then send you a credit agreement, which you will sign and return.
At this point, you have three days in which to reconsider and cancel the loan. The Truth in Lending Act (TILA) protects this right, and it comes with no questions asked. Your lender must relinquish their claim on your property and they must repay any fees they charged.
In this article, we will see when and how you can cancel a home loan.
Key points to remember
- Your right to cancel a home equity loan within three days of signing the credit agreement is federally protected.
- If you want to cancel within that time, your lender must return all the money you gave them and release their claim to your property.
- The three-day period begins when you receive a TILA disclosure and two copies of the TILA notice.
- You have until midnight on the third day to cancel, excluding Sundays and public holidays. You must notify your lender in writing that you wish to cancel.
- This right does not apply to certain types of mortgage loans, and even certain types of home equity loans are excluded. There are other cancellation rights provided by state and federal laws.
The three-day cancellation rule
The right to cancel a mortgage refinance is technically known as the right to rescind and was established by the Truth in Lending Act (TILA). It was created to protect consumers from unscrupulous lenders, by giving borrowers a cooling-off period and time to change their minds. Not all mortgage transactions have the right of rescission. The right of rescission only exists on home equity loans, home equity lines of credit (HELOCs), and refinances of existing mortgages where the refinance is with a lender other than the current mortgagee. This does not apply to holidays or second homes.
The rule states that you have three working days, including Saturdays but not Sundays, to cancel the loan. The first day begins after all of these things have happened:
- You sign the loan at closing, and
- You get a Truth in Lending disclosure form containing key information about the credit agreement, including the annual percentage rate (APR), finance charges, amount financed and payment schedule, and
- You receive two copies of a Loan Truth Notice explaining your right to cancel
If you did not receive the disclosure form or both copies of the notice, or if the disclosure or notice was incorrect, your lender has not fulfilled its obligations under TILA. In this case, you may have up to three years to cancel.
If you cancel the loan within the three-day period, your home is no longer secured and cannot be used to pay the lender. Your lender must also reimburse you for any fees they have charged: this includes application fees, appraisal fees or title search fees, whether paid to the lender or to another company that is part of the credit transaction. The lender has 20 days after your cancellation to reimburse these costs and vacate your accommodation.
If you received money or property from the lender, you can keep it until the lender shows that your home is no longer being used as collateral and returns the money you paid. Then you must offer to return the money or property to the lender. If the lender does not claim the money or property within 20 days, you can keep it.
If you cancel a home equity loan within the three-day period, your lender immediately waives their right to your home. They have 20 days to refund you the fees they charged.
Calculation of the third working day
Be careful when calculating the end of your cancellation period. You should receive the TILA Disclosure and two copies of the TILA Notice. Until you receive all these documents, the three-day period has not started. If you receive the notice a few days after closing, the countdown begins. You have until midnight on the third day to cancel, excluding Sundays and public holidays.
For example, if the closing is on a Friday, and it was the last thing to happen, you have until Tuesday midnight to cancel. But if you received your Truth in Lending Disclosure Form on Thursday and closed on Friday, but did not receive two copies of the Right to Cancel Notice by Saturday, you have until midnight Wednesday. to cancel.
Your lender cannot start acting on the loan until this three-day waiting period has passed. They cannot send you money (unless in escrow) or provide services. If you are using the loan to finance home renovations, you are not allowed to pay contractors or start work until the end of the period.
How to cancel your home equity loan
In order to cancel your home equity loan, you must notify your lender in writing. You must deliver or mail your written notice by midnight on the third day, and you cannot cancel by phone or face-to-face conversation. If you send a written notice, be sure to send it by registered mail so that you have a record of when you sent it.
Ask your lender to confirm that they received your cancellation notice and note the date they did so. They have 20 days from that date to return the money you paid them.
Are there any exceptions to the three day cancellation rule?
Yes. In some cases, the rule does not apply. This includes when you apply for a loan to buy or initially build your principal residence; you refinance your mortgage with the same lender who holds your loan and you no longer borrow funds (but if you borrowed additional money, the rule applies and you can cancel); or a government agency is the lender of a loan.
Will I owe money if I cancel a home equity loan?
No. The Truth in Lending Act states that as long as you cancel within the three-day period, your lender must release their claim to your property and they must return all money you paid them. They have 20 days to do so.
Can I waive my right to cancel?
Yes. If you need the money immediately, because, for example, your house was damaged by a storm, you can waive your right to cancel. To do this, you must give the lender a written statement describing the emergency and stating that you waive your right to rescind. The declaration must be dated and signed by you and any other person who also owns the house.
You have a federally protected right to cancel a home equity loan within three days of signing the credit agreement. If you do, your lender must return all the money you gave them and release their claim to your property. This three-day period begins when you receive a number of documents: a TILA disclosure and two copies of the TILA notice. From this moment, you have until midnight on the third day to cancel, excluding Sundays and public holidays. You must notify your lender in writing that you wish to cancel.
This right does not apply to certain types of mortgages, and even certain types of home equity loans are excluded. There are other cancellation rights provided by state and federal laws.