The Three-Day Cancellation Rule (Home Equity Loans)

This is the third of four planned posts on the subject of home equity loans.

We’re using a four part article published by the Federal Trade Commission (FTC) on their Consumer Information website. You can and should visit this site, not only to view this article but to see the other topics of information that pertain to many of us. Click here to visit.

Four part Series:

Home Equity Loans and Credit Lines – Introduction

If you’re thinking about making some home improvements or looking at ways to pay for your child’s college education, you may be thinking about tapping into your home’s equity — the difference between what your home could sell for and what you owe on the mortgage — as a way to cover the costs.

Loan or Line of Credit

Home equity financing can be set up as a loan or a line of credit. With a home equity loan, the lender advances you the total loan amount upfront, while a home equity credit line provides a source of funds that you can draw on as needed.

Shop and Compare

When considering a home equity loan or credit line, shop around and compare loan plans offered by banks, savings and loans, credit unions, and mortgage companies. Shopping can help you get a better deal.

Stay Within Your Budget

Remember that your home secures the amount that you borrow through a home equity loan or line of credit. If you don’t pay your debt, the lender may be able to force you to sell your home to satisfy the debt.

The Three-Day Cancellation Rule

Federal law gives you three days to reconsider a signed credit agreement and cancel the deal without penalty. You can cancel for any reason but only if you are using your principal residence — whether it’s a house, condominium, mobile home, or house boat — as collateral, not a vacation or second home.

Under the right to cancel, you have until midnight of the third business day to cancel the credit transaction. Day one begins after:

  • you sign the credit contract;
  • you get a Truth in Lending disclosure form containing key information about the credit contract, including the APR, finance charge, amount financed, and payment schedule; and
  • you get two copies of a Truth in Lending notice explaining your right to cancel.

For cancellation purposes, business days include Saturdays, but not Sundays or legal public holidays. For example, if the events listed above take place on a Friday, you have until midnight on the next Tuesday to cancel.

During this waiting period, activity related to the contract cannot take place. The lender may not deliver the money for the loan. If you’re dealing with a home improvement loan, the contractor may not deliver any materials or start work.

If You Decide to Cancel

If you decide to cancel, you must tell the lender in writing. You may not cancel by phone or in a face-to-face conversation with the lender. Your written notice must be mailed, filed electronically, or delivered, before midnight of the third business day.

If you cancel the contract, the security interest in your home also is cancelled, and you are not liable for any amount, including the finance charge. The lender has 20 days to return all money or property you paid as part of the transaction and to release any security interest in your home. If you received money or property from the creditor, you may keep it until the lender shows that your home is no longer being used as collateral and returns any money you have paid. Then, you must offer to return the lender’s money or property. If the lender does not claim the money or property within 20 days, you may keep it.

If you have a bona fide personal financial emergency — like damage to your home from a storm or other natural disaster — you can waive your right to cancel and eliminate the three-day period. To waive your right, 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 shares ownership of the home.

The federal three day cancellation rule doesn’t apply in all situations when you are using your home for collateral. Exceptions include when:

  • you apply for a loan to buy or build your principal residence
  • you refinance your loan with the same lender who holds your loan and you don’t borrow additional funds
  • a state agency is the lender for a loan.

In these situations, you may have other cancellation rights under state or local law.

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