A home equity loan is a second mortgage against your home with a fixed interest rate. When you take out a home equity loan, your lender pays you a lump sum that you’ll start to pay back immediately per the terms of the loan. Home equity loans can be a good idea if you have enough equity in your home and a strategy to pay back the debt, but they also come with risks. As such, you get a three-day window to cancel your home equity loan if you change your mind.
Cancellation rights under the Truth in Lending Act
The Truth In Lending Act, or TILA, is a federal law to protect consumers from unfair and predatory lending practices. Lenders and creditors must provide borrowers with clear information about the credit extended, such as pricing and terms, APR and annual fee. The TILA also grants consumers the right of rescission, or the right to cancel several specific kinds of home loans, which gives you three days to back out of the loan process without losing any money. However, the right of rescission only applies to home equity loans, home equity lines of credit, or HELOCs, and refinancing on existing mortgages with a new lender.
How to cancel a home equity loan
Homeowners have three business days to cancel a home equity loan (including Saturdays but not Sundays) without consequence. You must cancel in writing by midnight of the third business day. You will have already:
- Signed the loan at closing
- Received a TILA disclosure form with the outline of your loan, including the relevant APR, finance charge, amount financed and payment schedule
- Received two copies of a TILA notice with your right to cancel
After you send a letter or signed copy of the TILA notice within the three-day period, the creditor must refund any application, appraisal and title search fees associated with the loan within 20 days. But if you don’t receive the disclosure form or a TILA notice, or if either is incorrect, you’ll have up to three years to cancel.
What happens if I miss the three-day cancellation window?
Once the three-day window has passed, you’ll have to repay the loan to cancel it. You can pay it back directly to the lender or sell your house to repay the loan alongside the primary mortgage -- assuming you have enough savings. You can also refinance your home equity loan, but note that some home equity loans may have prepayment penalties.
The bottom line
If you’re in the three-day grace period, you’re federally backed to cancel your home equity loan. Your creditor must return any fees or payments you made and release any security interest you granted them in your home. But once that period has passed, the only way to get rid of your home equity loan is by repaying the loan itself.
Correction, 7:30 a.m. PT Jan. 25: An earlier version of this article defined the right of rescission as the right to cancel the refinancing of a mortgage. This is accurate but incomplete, as rescission also applies to home equity loans and HELOCs. The article has been corrected to clarify that the right of rescission is the right to cancel several specific kinds of home loans. We’ve replaced phrases that were not entirely original.
