A home equity loan—also known as an equity loan, a home equity installment loan, or a 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, because it is a secured debt. When you apply, your chosen lender runs a credit check and orders an appraisal of your home to determine your creditworthiness and the combined loan-to-value (LTV) ratio. They will then send you a credit agreement, which you sign and return.
At this point, you have three days during which you can reconsider and cancel the loan. The Truth in Lending Act (TILA) protects this right, and it is provided on a no-questions-asked basis. Your lender must give up their claim to your property, and they must refund all the fees that they have charged.
In this article, we’ll look at when and how you can cancel a home equity loan.
- 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 that time frame, your lender must return any money that you’ve given them and must give up their claim to your property.
- The three-day period starts 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.
- This right doesn’t apply to some types of mortgage, and even some types of home equity loan are excluded. There are other rights to cancel provided by state and federal law.
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 TILA. It was created to protect consumers from unscrupulous lenders, giving borrowers a cooling-off period and the 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.
The rule states that you have three business days, including Saturdays but not Sundays, to cancel the loan. 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.
If you cancel the loan within the three-day period, then 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; that includes 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 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.
If you cancel a home equity loan within the three-day period, your lender gives up their right to your home immediately. They have 20 days to refund you for any fees that they’ve charged.
Calculating the Third Business Day
Be careful when you work out when the end of your cancellation period is. You must receive the TILA disclosure and two copies of the TILA notice. Until you receive all of these documents, the three-day period hasn’t started. If you receive the notice a few days after closing, the countdown starts 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. But if you received your TILA disclosure form on Thursday and you closed on Friday, but you 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 your home equity loan, 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 are mailing a written notice, make sure that you send it as registered mail so you have a record of when you mailed it.
Ask your lender to confirm that they have received your cancellation notice, and keep a record of the date when they did so. They have 20 days from this date to return any money that you’ve paid them.
Are there exceptions to the three-day cancellation rule?
Yes. In some cases, the rule doesn’t apply. This includes when:
- You apply for a loan to buy or to initially build your main residence
- You refinance your mortgage with the same lender who holds your loan and you don’t borrow more funds (but 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 the three-day period, your lender must give up their claim on your property and must return any money that 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—because, for example, your home has been damaged by a storm—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 are waiving your right to cancel. The statement must be dated and signed by you and anyone else 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 that you’ve given them and must give up their claim to your property. This three-day period starts when you receive a number of documents: 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 mortgage, and even some types of home equity loan are excluded. There are other rights to cancel provided by state and federal law.