What Is the Right of Rescission and How Long Do You Have to Rescind?

To rescind a loan means to cancel the loan agreement, and a right of rescission is a term that refers to a consumer's right to cancel a loan contract. While this term can be used for any type of consumer credit transaction that allows the borrower to cancel after the loan agreement has been signed, it's mostly used with residential mortgage transactions -- specifically, refinancing a mortgage.

What is the right of rescission or right to rescind?

The Truth in Lending Act created the right of rescission to protect borrowers from making mortgage refinancing decisions they would come to regret.

Consumers who refinance their mortgage have a three-day period of rescission rights. During this time, they can change their mind and cancel the loan, even if closing documents have already been signed. This right applies to refinancing loans, as well as to a home equity loan or line of credit (often referred to as a second mortgage).

For a loan to qualify, the lender needs to be different from the borrower's current mortgage lender. For example, if your current mortgage is held by Wells Fargo, you can't use Wells Fargo to refinance and be protected under the right of rescission law. Check out our list of best mortgage lenders if you need somewhere to start your search. In addition, our mortgage calculator will tell you how much you can save by refinancing at different rates with various lenders. 

Only primary residence loans qualify for rescission. If you refinance a second home or investment property, you can't use this provision to cancel your loan.

It's important to note that the right of rescission does not apply when purchasing a home. For obvious reasons, the logistics of canceling a mortgage after a seller has received the money and you've started to move in would be a nightmare. The right of rescission only applies in cases of refinancing, where only money (not property) changes hands. For more information on the ins and outs of buying a home, check out our beginner's guide to home loans.

How to exercise the right of rescission

Let's say you refinance your mortgage. The next day, you find a much better offer and decide to rescind. What do you do?

If you get a refinancing loan and decide to exercise your right of rescission, you need to let your lender know in writing before the rescission period expires. To be clear:

You must mail your request to cancel your loan before the three-day period expires, and you must document that you mailed it or that your lender received it during the time window.  

Most lenders provide a rescission notice form along with each loan's closing documents that a borrower can use to rescind their refinancing loan. You don't have to use it. You can simply write a letter. As long as you make your intention to rescind clear, the actual form you use doesn't matter. Be sure to provide information including your loan number, name, and address, so the creditor can clearly identify the loan you've decided to cancel.

The lender is required to complete the cancelation of the loan within 20 days of the borrower exercising their right of rescission, although it might happen much sooner. And it's important to point out that the lender is also required to refund any fees collected.

How to calculate the three-day right of rescission period

One of the most misunderstood parts of the right of rescission laws is calculating when the three-day period begins. According to the Consumer Finance Protection Bureau, three things need to happen before the clock starts:

• The borrower signs the promissory note, which is a loan document also commonly called the credit contract.
• The borrower receives a Truth in Lending disclosure. This is called the Closing Disclosure in mortgage terms.
• The borrower receives two copies of a notice explaining the right of rescission.

Once all three of these things happen, the clock starts. The right of rescission lasts until midnight of the third business day after the date on which these events take place. For this purpose, business days are any days except Sundays and legal holidays.

As an example, let's say you sign a home loan agreement and receive the required documents on a Monday. Assuming there are no holidays, your right of rescission would expire on Thursday night at midnight.

The right of rescission is an important consumer protection that mortgage refinancers can use to back out of a loan agreement.

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