Right of Rescission
The right of rescission period is a provision under the Truth in Lending law that essentially gives homeowners who are refinancing their home a chance to mull things over before committing 100% to new loan terms. If a homeowner decides to refinance their mortgage, once loan documents are signed they will have the right to rescind for a period of three business days.
The rescission period begins the day after loan documents are signed, and ends three business days later, including Saturdays, but not Sundays or holidays. On midnight on the third business day the rescission period is over, and signed documents become official. For example, if loan documents are signed on Monday, the rescission period begins Tuesday, and ends Thursday night at midnight. On Friday the loan would likely fund and record. Or if loan documents are signed on Thursday, the rescission period begins on Friday, and ends Monday at midnight because Sunday doesn’t count as a business day.
During the rescission period the borrower has the chance to assess the situation and make absolutely sure they want to go through with the refinance. During this time they can rate shop and find something better if need be. And most importantly, if at any time during those three days they decide they want to back out, they can do so without penalty.
The rescission period isn’t available for all mortgage transactions. It is limited to refinances on owner-occupied properties only! Purchase transactions do not have a rescission period. And Vacation/second homes and investment properties do not have a rescission period, even if it is a refinance transaction. Lenders also restrict the right of rescission if the borrower is refinancing their loan with the same lender the loan was originally financed with. *For cash-out refinances financed with the same original lender, the cash-out portion is the only portion that carries a rescission period.
Home equity lines always have a right of rescission period, but it only allows a borrower to rescind on their draw amount, not the credit line itself unless it is an owner-occupied refinance. In other words, when a borrower opens a line of credit, they decide on a certain draw amount, and once they sign loan documents they have three business days to rescind the amount of the draw, but not the overall loan transaction unless it is an owner-occupied refinance. So purchase transactions will carry the right of rescission on the Home equity line draw amount.
Make sure you know your (pardon the pun) rights when it comes to the right of rescission. Lenders and brokers may not give you all the facts, or they may lie to ensure the deal funds, so keep yourself informed.
