How to Cancel Your Home Equity Loan

You can cancel a home equity loan, even if you’ve already closed on it, but you’ll have to act quickly. 

A home equity loan allows you to tap into the equity you’ve built up in your home without disturbing the interest rate on your primary mortgage. It can be a good idea if you have 15% to 20% of equity in your home and a clear strategy for how you plan to pay it back. However, it comes with a major risk: You could lose your home if you default on payments. As such, if you change your mind after closing on a home equity loan, you’ll have a three-day period in which you can back out of the loan with no consequences. This is known as the “right of rescission.” 

Here’s what to know about canceling a home equity loan, how to calculate your three-day cancellation period, as well as what to do if you miss that window.

Cancellation rights under the Truth in Lending Act

The Truth in Lending Act, or TILA, is a federal law designed to protect borrowers from unfair and predatory lending practices. Namely, lenders and creditors are required to disclose all details regarding pricing, terms, annual percentage rate and annual fees whenever a person obtains certain types of loans and credit cards. 

But the TILA also grants consumers the right to rescission, or the right to cancel several types of home loans within three business days of the loan’s closing. The right to rescission ensures that a person won’t lose any money when backing out of the home loan process. But it only applies to home equity loans, home equity lines of credit, or HELOCs, and mortgage refinances.

While the TILA affords borrowers some protections, it’s important you understand all your options before committing to a home equity loan. “Ultimately, you should only take out a loan after you are confident that it is the best solution for your financial situation and then work with a trustworthy lender,” said Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans.

How to cancel a home equity loan

Borrowers have three business days to exercise their right to rescission. But the clock won’t start ticking on your three-day cancellation period until these three things happen:

• You signed the loan at closing.
• You received a TILA disclosure form with key information about your loan, including the APR, finance charge, amount financed and payment schedule.
• You received two copies of a TILA right-to-cancel notice.

You should have already received your TILA disclosure form and right-to-cancel notice before closing. But if you don’t receive the disclosure form or two copies of the right to cancel notice -- or either is incorrect -- you may have up to three years to cancel your loan. 

To cancel your home equity loan, you will need to send either a written letter with your request or a signed copy of the TILA notice to your lender before midnight on the third day of your cancellation period. You don’t need to provide your lender with a reason for canceling, though it could be because you found a better deal or noticed a detail in the fine print that you didn’t like. 

As with all major financial moves, keeping good records is essential. Make sure to keep a copy of the dated letter in case your lender is uncooperative or there’s an issue with the postal service. This way you can prove that you initiated your cancellation request within the three-day window. It’s also important to confirm with your lender that it has received your notice. Once confirmed, the lender has 20 days to refund any application, appraisal and title search fees associated with the loan.

How to calculate the three-day cancellation period

The three-day countdown starts once you’ve closed on your loan. But if you don’t receive the TILA disclosure and two copies of the TILA right-to-cancel notice until after you close, the three-day period will begin once you’ve received those documents.

In addition, the law is somewhat lenient with timing to accommodate people who may have signed documents later in the day. 

Here’s what it looks like in practice: Let’s say you sign your papers on Monday at 3 p.m. The first day in the cancellation period would be Tuesday, the second would be Wednesday and the final day would be Thursday. You would have until Thursday at 11:59 p.m. to cancel on your loan. Sunday and federal holidays aren’t included in the count, but Saturdays are.

What to do if you miss the three-day cancellation window

If you miss the three-day cancellation window, it’s likely that your only recourse will be to pay back your home equity loan. If you have enough savings, you can either pay it back directly to the lender or sell your house to repay the loan alongside your primary mortgage. You can also refinance your home equity loan, but note that some home equity loans may have prepayment penalties.

Correction: An earlier version of this article was assisted by an AI engine, and it mischaracterized some aspects of rescission. Those points were all corrected, and we also replaced phrases that were not entirely original. This version has been substantially updated by a staff writer.