Home Equity Loans: The Three-Day
If you’re considering applying
for a personal loan and using your home to guarantee
repayment, you should know that a federal credit law
gives you three days to reconsider a signed credit agreement
and cancel the deal without penalty. Your "right
to rescind" or "right to cancel" is guaranteed
by the Truth In Lending Act. You can rescind for any
reason but only if you are using your principal residence—whether
it is a condominium, mobile home, or house boat—as
collateral, not a vacation or second home.
Under the right to rescind, you have
until midnight of the third business day to cancel the
credit transaction. Day one begins after all three of
the following occur:
- you sign the credit contract;
- you receive a Truth in Lending disclosure form containing
certain key information about the credit contract,
including the annual percentage rate; finance charge;
amount financed; and payment schedule; and
- you receive two copies of a Truth in Lending notice
explaining your right to rescind.
For rescission purposes, business
days include Saturdays but not Sundays or legal public
holidays. For example, if the events listed above take
place on a Friday, you have until midnight on the next
Tuesday to rescind.
During this waiting period, activity
related to the contract cannot take place. The creditor
may not deliver the money for the loan. If you’re
dealing with a home improvement loan, the contractor
may not deliver any materials or start work.
If you decide to rescind, you must
notify the creditor in writing. You may not rescind
by telephone or in a face-to-face conversation with
the creditor. Your written notice must be mailed, filed
for telegraphic transmission, or delivered if by other
written means, before midnight of the third business
If you cancel the contract, the security
interest in your home is also cancelled, and you are
not liable for any amount, including the finance charge.
The creditor has 20 days to return all money or property
you paid as part of the transaction and release any
security interest in your home. If you received money
or property from the creditor, you may retain it until
the creditor shows that your home is no longer being
used as collateral and returns any money you have paid.
Then, you must offer to return the creditor’s
money or property. If the creditor does not claim the
money or property within 20 days, you may keep it.
If you have a bona fide personal financial
emergency—such as damage to your home from a storm
or other natural disaster—the law allows you to
waive your right to rescind and eliminate the three-day
period. To waive your right, you must give the creditor
your own written statement describing the emergency
and stating that you are waiving your right to rescind.
The statement must be dated and signed by you and anyone
else who shares in ownership of the home. But remember:
if you waive your right to rescind, you must go ahead
with the transaction.
The right to rescind does not apply
in all situations when you are using your home for collateral.
Among the exceptions are:
- when you apply for a loan to buy or build your principal
- when you refinance your loan with the same creditor
who holds your loan and you don’t borrow any
additional funds; or
- when a state agency is the creditor for a loan.
In these situations, you may have
other cancellation rights under state or local law.