A home equity loan — also known as an equity loan, home equity installment loan, or second mortgage — is a type of consumer debt. Home equity loans allow homeowners to borrow against the equity in their homes. This type of loan is relatively easy to arrange as it is a secured debt. When you apply, your selected lender will conduct a credit check and order an appraisal of your home to determine your creditworthiness and combined loan-to-value ratio. They will then send you a loan agreement, which you sign and send back.
At this point, you have three days to reconsider and cancel the loan. The Truth in Lending Act (TILA) protects this right and it is granted on a no-question-asked basis. Your lender will have to relinquish their claim to your property and refund any fees they charged.
In this article, we look at when and how you can cancel a home equity loan.
The central theses
- Your right to cancel a home loan within three days of signing the loan agreement is protected nationwide.
- If you want to cancel within this period, your lender will have to return the money you gave them and give up their claim to your property.
- The three-day period begins when you receive a TILA disclosure and two copies of the TILA notice.
- You can cancel up to 24:00 on the third day, excluding Sundays and public holidays. You must notify your lender in writing that you wish to cancel.
- This right does not apply to some types of mortgages, and even some types of home equity loans are excluded. There are other statutory cancellation rights provided by state and federal laws.
The three day cancellation rule
The right to cancel a mortgage refinance is technically known as the right of withdrawal and was introduced by the Truth in Lending Act (TILA). It was created to protect consumers from unscrupulous lenders and give borrowers time to think things over and change their minds. Not all mortgage transactions have a right of withdrawal. The right of cancellation applies only to home equity loans, home equity lines of credit (HELOCs), and refinances to existing mortgages where the refinance is with a lender other than the current mortgagee. It does not apply to holiday homes or second homes.
The rule states that you have three business days, including Saturdays but not Sundays, to cancel the loan. The first day begins after all these things have happened:
- You sign the loan upon closing and
- You will receive a “Truth in Lending” disclosure form with key information about the loan agreement, including the annual percentage rate (APR), financing fee, financing amount and payment schedule
- You will receive two copies of a Truth in Lending notice explaining your right of withdrawal
If you did not receive the disclosure form or both copies of the notification—or if the disclosure or notification was incorrect—then your lender has failed to meet its obligations under TILA. In this case, you can cancel for up to three years.
If you cancel the loan within the three-day period, your home is no longer collateral and cannot be used to pay the lender. Your lender must also reimburse you for any fees they charged: These include application fees, appraisal fees, or title search fees, whether they were paid to the lender or to another entity involved in the loan 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 lender, you can keep it until the lender proves that your home is no longer being used as collateral and refunds the money you 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, you can keep it.
If you cancel a home equity loan within the three-day period, your lender immediately waives your right to occupancy. They have 20 days to refund you for any charges they have made.
Third Business Day Calculation
Be careful when working out when the end of your cooling off period is. You must receive the TILA Disclosure and two copies of the TILA Notice. Until you have received all these documents, the three-day period has not started. If you receive the cancellation a few days after the closure, the countdown will then begin. You can cancel until midnight on the third day, excluding Sundays and public holidays.
For example, if the closure is on a Friday and it was the last, you have until midnight on Tuesday to cancel. But if you received your disclosure form from Truth in Lending on Thursday and closed on Friday, but didn’t receive two copies of the cancellation policy by Saturday, you have until midnight on Wednesday to cancel.
Your lender can only draw on the loan after this three-day waiting period has expired. They cannot send you the money (except in escrow) or provide services. If you’re using the loan to finance renovations, you’re not allowed to pay contractors or start work until after the deadline.
How to Cancel Your Home Loan
To cancel your home equity loan, you must notify your lender in writing. You must give or mail your written cancellation before midnight on the third day, and you cannot cancel by telephone or in person. If you send a written notice by post, be sure to send it by registered mail so you have a record of when you posted it.
Ask your lender to confirm that they received your cancellation notice and make a note of the date they received it. You have 20 days from that date to refund the money you paid them.
Are there any exceptions to the three day cancellation rule?
Yes. In some cases the rule does not apply. This includes when you apply for a loan to buy or initially build your primary home; You refinance your mortgage with the same lender who holds your loan and you don’t borrow any more money (but if you’ve borrowed extra money, the rule applies and you can cancel); or a government agency is the lender.
Will I owe money if I cancel a home equity loan?
no The Truth in Lending Act states that as long as you cancel within the three-day period, your lender must forfeit their claim to your property and return any monies you paid. They have 20 days to do this.
Can I waive my right of withdrawal?
Yes. If you need the money immediately – for example because your house was damaged by a storm – you can waive your right of withdrawal. To do this, you must provide the lender with a written statement describing the emergency and declaring that you are waiving your right of withdrawal. The declaration must be dated and signed by you and anyone else who also owns the home.
The final result
You have a nationwide protected right to cancel a home loan within three days of signing the loan agreement. If you do this, your lender will have to return any money you gave them and forfeit their claim to your property. This three-day period begins when you receive a set of documents: a TILA Disclosure and two copies of the TILA Notice. From this point you can cancel until the third day at 24:00, excluding Sundays and public holidays. You must notify your lender in writing that you wish to cancel.
This right does not apply to some types of mortgages, and even some types of home equity loans are excluded. There are other statutory cancellation rights provided by state and federal laws.