However, the three-day cancellation rule does not apply to all signed contracts. It allows you to cancel only agreements that use your principal residence as collateral. This main home can be a house, condominium, mobile home, or houseboat. The three-day rule doesn’t apply to vacation or second homes. Typically, the three-day cancellation rule applies to agreements such as home equity loans, home equity lines of credit (HELOC), refinancing agreements, and some reverse mortgages.
Alternate names: consumers’ right to rescind, right of recission, right to cancel
For example, the three-day cancellation rule might come in handy if you took out a home equity loan on Monday, but had second thoughts. Due to the cancellation rule, you would have until midnight on Thursday to cancel the deal without further obligations or penalties.
How the 3-Day Cancellation Rule Works
The three-day cancellation rule provides you with a bit of legal wiggle room to change your mind for any reason after signing a contract for a loan that uses your home as collateral. As long as you notify the lender within the appropriate time frame, you won’t pay any penalty. The three-day cancellation rule is designed to protect consumers from high-pressure sales tactics that may be used by unscrupulous lenders. Generally, you have until midnight of the third business day to cancel the deal without facing a financial penalty. In this case, Saturdays count as business days (provided that the bank or credit union is open for all lending-related business functions), but Sundays and legal public holidays do not. The clock officially starts ticking once three events have occurred:
You sign the loan agreement at closing. You receive a Truth in Lending disclosure form that provides the details of the contract, including the APR, finance charges, amount being financed, and the repayment schedule. You receive two copies of the TILA notice that explains your right to cancel.
Day One starts on the first business day after the last of the three events is complete. Let’s say you receive the disclosure form and two copies of the right to cancel immediately after signing your contract on Friday. In that case, Day One is Saturday, and you have until midnight on Tuesday to cancel without penalty. However, say you receive your TILA form on Thursday and close on Friday, but you don’t receive your two copies of the right to cancel notice until Saturday. In that case, Day One is Monday, and you have until midnight on Wednesday to cancel. During the three-day period, the lender cannot take any action on the loan either directly or through another person. For example, if you applied for a home improvement loan, the lender can’t provide you with the loan amount, and the contractor can’t deliver materials or begin work. The loan can start accruing finance charges, but if you rescind your agreement within three days, you will be refunded any money you paid, including fees for the application, appraisal, and title search. In other words, you will not lose any money if you rescind within three days.
Three-Day Cancellation Rule vs. Cooling-Off Rule
Some people may use the three-day cancellation rule interchangeably with the “cooling-off” rule, and while the two rules share similarities, they also have important differences.
Inform the lender in writing of your desire to cancelDeliver or mail your written notice before midnight on the third business dayUnderstand that you can’t cancel an agreement during a conversation over the phone or in person
If you cancel the loan in time, your home is no longer considered collateral and you don’t owe the lender any money. After receiving your written cancellation notice, the lender has 20 days to refund any fees you paid as part of the transaction and release your property as collateral. If you received any money or property from the lender, you may keep it until the lender returns all fees and shows proof that your home is no longer being used as collateral.
Exceptions to the 3-Day Cancellation Rule
Even when you use your primary home as collateral, there are a few situations in which the Three-Day Cancellation Rule may not apply, including if you:
Apply for a home loan to either buy or build your primary residence Refinance your mortgage through the lender that holds your current home loan, and you don’t borrow any additional money; however, if you borrow additional money while refinancing, the three-day cancellation rule applies. Obtain a loan through a state agency
Although the federal three-day cancellation rule may not apply in the above situations, you may have other cancellation rights under state or local laws.
