What Is The Right of Rescission?

When you borrow money against a home you already own, the Federal government is there trying to help you avoid making a serious or costly mistake.  The Federal Truth In Lending Act (in effect since 1979) requires that you receive a three business day “cooling off” period after you sign the mortgage papers to decide whether or not this was the best deal for you.  Included in the huge packet of papers given to you at a mortgage closing, you should find a document called Notice of Right of Rescission.  In fact, you should receive two copies of this document.  Once executed and properly delivered with the required time, you can back out of a mortgage for any reason.

The Right of Rescission is a very powerful tool to assure that mortgage lenders give all of the proper disclosures and comply with all parts of the law.  Some states, like Connecticut, have also adopted parts of this law and also enforce similar requirements.

The Truth in Lending Act is a very complicated bit of legislation and is very easy to violate.  One unfortunate effect of violating the law is the requirement that all interest paid on the loan be refunded to the borrower.  If an improper notice of right to rescind is given to the borrower, the three business days to rescind is extended to three years.  While you must repay all of the money originally lend, you get the benefit of all the interest paid on the loan be refunded to be applied to that balance.  The effect is like getting an interest-free loan for three years.  Since most interest on any loan is paid in the early years of the loan, this can amount to a sizable amount of money.