What is the right of termination for mortgage loans?
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If you get a mortgage refinance loan but reconsider your decision, you have the legal right to cancel your loan agreement within three days. The rescission right allows you to cancel or terminate certain types of home loans within this time and get your money back.
Understanding what the right of termination is and how it works will help you think through your decision and backtrack if necessary.
It is important to have confidence in the refinance lender you choose. Comparing rates from multiple lenders can help you make the best decision based on your situation. If you want to refinance your mortgage, visit Credible to learn more and view your pre-qualified mortgage refinance rates.
What is the right of withdrawal?
The Right to Cancel is a provision of the federal Truth in Lending Act (TILA), and it gives borrowers the legal right to cancel certain types of home loans with a new lender within three days of closing – without ask questions. The right of withdrawal was created to protect consumers by giving them the opportunity to change their mind.
How does the right of withdrawal work?
You can cancel certain types of home loan agreements for any reason – for example, if you decide you don’t want to take on additional loan repayments or if you have been able to find a better loan deal after going through the closing process.
Whatever the reason, you will need to cancel your loan agreement within the legal deadlines and once you have received certain documents (more on this below).
You can notify the lender using a form provided to you – it may be accompanied by documents sent to you before the loan was closed – or you can write a letter stating your request.
The important thing to remember is that the letter must be delivered by the deadline stated in your closing documents. It’s a good idea to keep a copy of the written request and any documentation confirming that you sent the letter and that it was delivered on time.
Knowing the cost of a loan can help you decide if you want to refinance your mortgage. Credible allows you compare mortgage refinance rates from various lenders, without affecting your credit score.
When does the right of withdrawal begin and end?
The rescission right period is three business days once the following events occur (usually when the loan is closed):
- You sign your mortgage contract or your promissory note.
- You receive a Closing Statement, also known as a TILA Information Document.
- You receive two copies of a notice indicating your right as a consumer to terminate the loan agreement.
The first day is the first business day following receipt of copies of final notices. You will then have until midnight on the third working day to withdraw. This means that if one of these days falls on a Sunday or a legal holiday, these days do not count. However, Saturday counts as a business day under TILA.
For example, if you receive your last notice explaining your right of withdrawal on a Friday, you will have until the following Tuesday at midnight to submit your request for withdrawal.
If your lender does not provide you with the Truth in Lending Act disclosure or any notice of your right to rescind, or if you get them but they get it wrong, you can get up to three years from the date closing to cancel the loan. In this situation, it is a good idea to consult a lawyer.
To which mortgages can a right of termination apply?
The following types of home loans have a right of termination:
You will not be able to cancel a mortgage contract linked to the purchase of a new house. In addition, the right of termination has certain additional restrictions, such as refinancing with the same lender. In this case, you can only use your right of withdrawal for the the amount of the new loan that is greater than the original principal amount.
Other limitations include refinancing or take out a home equity loan or HELOC for a property that isn’t your primary residence — an investment property or a second home you live in part of the year, for example. You will also not be able to exercise your right of withdrawal if you are renewing optional insurance premiums or if your lender is a government agency.
How to exercise the right of withdrawal?
If you have decided to cancel your loan contract, here is how to exercise the right of withdrawal:
- Verify that you have received the right to rescind notices from your lender.
- Follow the lender’s instructions by sending in the provided form or writing a letter with your request.
- Clearly state that you want to cancel the contract, the date you made the request and relevant information such as the loan number.
- Send the request to the address provided by your lender or to the address where you have been instructed to send your monthly payments, within three business days.
- Keep documentation or proof that you sent the application to your lender.
Although you can terminate your loan agreement for any reason, it makes more sense if you have found a significantly better rate elsewhere or if you can no longer afford the loan. You should expect a refund within 20 days of any fees you paid for the loan. You can keep any funds or property received at closing, but once the lender pays you back, you will need to return it.
If refinancing is the right financial decision for you, Credible allows you to compare mortgage refinance rates from various lenders in minutes.
Will exercising the right of withdrawal affect your credit?
Since you are not taking out a new loan when you exercise the right to terminate, there is technically nothing for creditors to report, so it will not affect your credit. The only activity the creditor will report is the thorough investigation for your initial loan application.
If you decide to apply for a new loan shortly after canceling your original loan, your credit reports may show that you have more than one firm credit application for your loan applications, which could negatively affect your credit.