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A home equity loan is a type of consumer debt that allows homeowners to borrow against the equity in their homes. After you apply, your lender will send you a credit agreement to sign and return.
At this point, you have three days to reconsider and cancel the loan. If you decide to cancel, your lender must relinquish their claim to your property and refund all fees they have charged. Discover how and when you can cancel a home equity loan.
Key Takeaways
- 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 the three days, your lender must return any money you paid them and relinquish their claim to your property.
- The three-day period begins when you receive a Truth in Lending Act (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 tell your lender in writing that you want to cancel.
- The right to cancel doesn’t apply to certain types of mortgage and home equity loans.
The Three-Day Cancellation Rule
The right to cancel the refinancing of a mortgage is technically known as the right of rescission and was established by the Truth in Lending Act (TILA). It was created to protect consumers from unscrupulous lenders, providing borrowers with a cooling-off period and time to change their minds.
Not all mortgage transactions have the right of rescission. The right of rescission exists only on home equity loans, home equity lines of credit (HELOCs), and refinances of existing mortgages in which the refinancing is done with a lender other than the current mortgagee. It doesn’t apply to vacation homes or second homes.
When the Three-Day Cancellation Period Begins
The rule states that you have three business days to cancel the loan, including Saturdays, but not Sundays. Day one begins after all of these things have happened:
- You sign the loan at closing, and
- You get a TILA disclosure form with key information about the credit contract—including the annual percentage rate (APR), finance charge, amount financed, and payment schedule—and
- You get two copies of a TILA notice explaining your right to cancel
If you didn’t get the disclosure form or the two copies of the notice—or if the disclosure or notice was incorrect—then your lender hasn’t fulfilled their obligations under TILA. In that case, you may have up to three years to cancel.
What Happens After You Cancel
If you cancel the loan within the three days, your home is no longer collateral and can’t be used to pay the lender. Your lender also must refund you all of the fees that they’ve charged, including 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 you cancel to refund these fees and release your home.
If you received money or property from the mortgage lender, you can keep it until the lender shows that your home is no longer being used as collateral and returns any money that you’ve paid. Then, you must offer to return the lender’s money or property. If the lender doesn’t claim the money or property within 20 days, then you can keep it.
Important
If you cancel a home equity loan within three days, your lender immediately gives up their right to your home. They have 20 days to refund you for any fees they’ve charged.
Calculating the Third Business Day
Be cautious when determining when your cancellation period ends. You must receive the TILA disclosure and two copies of the TILA notice. The three-day period will not start until you receive all of these documents. If you receive the notice a few days after closing, the countdown begins then. You have up until midnight on the third day to cancel, excluding Sundays and public holidays.
For example, if the closing happens on a Friday, and if that was the last thing to happen, you have until midnight on Tuesday to cancel. However, if you received your TILA disclosure form on Thursday and you closed on Friday but didn’t receive two copies of the right-to-cancel notice until Saturday, then you have until midnight on Wednesday to cancel.
Your lender can’t begin to take action on the loan until this three-day waiting period has passed. They can’t send you the money (except in escrow) or provide services. If you are using the loan to fund home improvements, you are not allowed to pay contractors or begin work until after the period has passed.
How to Cancel Your Home Equity Loan
To cancel a home equity loan or home equity line of credit, you must inform your lender in writing. You must deliver or mail your written notice before midnight on the third day, and you can’t cancel by phone or in face-to-face conversation. If you mail the written notice, ensure that you send it via registered mail so that you have a record of when you mailed it.
Ask your lender to confirm receipt of your cancellation notice and keep a record of the date they received it. They have 20 days from this date to return any money you’ve paid them.
Are There Exceptions to the Three-Day Cancellation Rule?
Yes. In some cases, the rule doesn’t apply, including when:
- You apply for a loan to buy or initially build your primary residence.
- You refinance your mortgage with the same lender who holds your loan, and you don’t borrow additional funds. However, if you borrowed additional money, then the rule applies, and you can cancel.
- A state agency is the lender for a loan.
Will I Owe Any Money if I Cancel a Home Equity Loan?
No. The Truth in Lending Act (TILA) states that as long as you cancel within three days, your lender must give up their claim on your property and return any money you’ve paid them. They have 20 days to do this.
Can I Waive My Right To Cancel?
Yes. If you need the money immediately, such as when a storm has damaged your home, then 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’re waiving your right to cancel. The statement must be dated and signed by you and any other person who also owns the home.
The Bottom Line
You have a federally protected right to cancel a home equity loan within three days of signing the credit agreement. If you do so, your lender must return any money you’ve given them and give up their claim to your property. This three-day period begins when you receive a few documents, including a TILA disclosure and two copies of the TILA notice.
From this point, you have until midnight on the third day to cancel, excluding Sundays and public holidays. You must tell your lender in writing that you want to cancel. This right doesn’t apply to some types of mortgages and home equity loans. There are other rights to cancel provided by state and federal law.
