Your Three-Day Right to Cancel a Mortgage Refinance: How the Rescission Rule Works

Federal law provides homeowners with a crucial safety net: a three-day right to cancel after signing the final paperwork for a mortgage refinance or home equity loan. This rule, formally known as the right of rescission, allows you to reconsider your decision without penalty. It is a core consumer protection that does not apply to standard home purchase loans. Understanding the specific timeline and procedures for cancellation is essential to exercising this right effectively.

What is the Three-Day Right of Rescission?

The right to cancel is granted by the Truth in Lending Act (TILA), a federal law enacted to protect consumers by standardizing credit cost disclosures. Enforced by the Consumer Financial Protection Bureau (CFPB), this rule mandates that lenders provide two copies of a cancellation notice at closing for most refinances and second mortgages. The primary purpose is to give you a final opportunity to review the loan terms and backing out if you have second thoughts.

Key Point: This protection is specifically for loans where your primary residence is used as collateral, excluding initial purchase mortgages.

How Does the 3-Day Cancellation Period Work?

The rescission period calculation is strict and based on business days. The count begins the first business day after you sign your closing documents. Saturdays, Sundays, and federal holidays are not counted.

• Day 1: The first business day after signing.
• Day 2: The next business day.
• Day 3: The final business day; your cancellation must be received by midnight.

For example, if you close on a Friday, Day 1 is Monday, Day 2 is Tuesday, and your cancellation deadline is midnight on Wednesday. If you close on a Thursday before a Labor Day weekend (with a Monday holiday), Day 1 is Friday, Day 2 is the following Tuesday, and your deadline is midnight Tuesday.

You can waive this right if you have a bona fide personal financial emergency and need the funds immediately. This waiver must be done in writing separately. Critically, if the lender fails to provide you with two copies of the right to cancel notice, the rescission period extends to three years.

How Do You formally Cancel the Loan?

A verbal request is insufficient. Your cancellation must be in writing to be legally valid. You can use the form provided in your closing package or send a formal letter to your lender. The CFPB advises sending it via a method that provides proof of delivery and timestamp, such as certified mail, and to always keep a copy for your records.

Upon valid cancellation:

• The lender has 20 days to refund any fees you paid and cancel its security interest on your home.
• You must return any loan proceeds you received from the lender.

It is also your responsibility to continue making payments on your original mortgage, as the refinanced loan will not have paid it off.

Why Doesn't This Rule Apply to Home Purchase Loans?

The three-day right of rescission is designed for transactions where a homeowner is placing new debt on an existing residence. A home purchase loan is considered a simultaneous exchange where the buyer acquires the property title and the lender places a lien. Different consumer protections apply to purchase loans, primarily through the TILA-RESPA Integrated Disclosure (TRID) rules. These rules ensure you receive detailed loan estimates and closing disclosures well before closing, giving you time to review terms without a post-closing cancellation right.

> To exercise your right to cancel, ensure your written notice is delivered by the midnight deadline on the third business day. Always verify you received two copies of the cancellation notice at closing, as this protects your three-day window.