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If you need a personal loan and are thinking
about using your home as security, you should
know about a credit law that gives you extra
time to reconsider the loan agreement. When
you use your home as collateral for a loan, you
generally have the right to cancel the credit
transaction within three business days. This is
called your "right of rescission," and it is
guaranteed by the Federal Truth in Lending Act.
The right of rescission gives you three extra days
to reconsider whether you want to use your
home to guarantee repayment for a personal
loan. The right applies even if your home is a
condominium, mobile home, or house boat,
as long as it is your principal residence. The right
applies to certain installment loans -- where you
borrow a fixed amount and repay the debt on
an agreed payment schedule -- as well as to
home equity credit lines -- a form of revolving
credit in which your home serves as collateral. |
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What Rescinding a Credit Transaction Means
Rescinding a credit transaction means you are canceling the deal. In other words,
you decide that you do not want the loan or the service being financed.
You can rescind the credit transaction within three days for any reason. For
example, you may find better credit terms, such as a loan that offers a lower
interest rate or does not require the use of your home as collateral.
How to Rescind a Credit Transaction
Unless you waive your right of rescission, you have until midnight of the third
business day after the transaction to cancel the contract. The first day after all
three of the following events occurs counts as Day One:
- You sign the credit contract.
- You receive a Truth in Lending disclosure form containing certain
important disclosures about the credit contract. These disclosures
explain the key terms of the credit being offered: the annual
percentage rate; the finance charge; the amount financed; the
total of payments; and the payment schedule.
- You receive two copies of a notice explaining your right to rescind.
You should be aware that for rescission purposes, business days include Saturdays,
but not Sundays or legal public holidays. For example, if the last of the above
three events occurs on a Friday, you have until midnight on the following Tuesday
to rescind.
During this waiting period, your creditor should not take any action on your
transaction. For example, the creditor should not give you the money from the
loan or, if you are dealing with a home improvement loan, the contractor should
not deliver any materials or start work.
If you decide to exercise your right of rescission, you must notify the creditor in
writing that you are canceling the contract. You may use the form provided to
you by the creditor, a letter, or a telegram. Whatever form of written notice you
use, make sure it is delivered, mailed, or filed for telegraphic transmission before
midnight of the third business day. Remember: You cannot rescind just by
telephoning or visiting the creditor.
If you never receive the disclosures or the notice of rescission from the creditor
(see numbers 2 and 3 above), you can cancel at any time during the first three
years after you sign the credit contract, or before you sell your home -- whichever
occurs first.
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What Happens When You Rescind
Within 20 days after a creditor receives your notice of rescission, all money or property you paid as part of the credit transaction must be returned to you. The
creditor also must release any security interest in your home.
If you have received money or property (such as building materials) from the
creditor, keep it until the creditor proves that your home is no longer being
held as collateral and returns any money you already have paid. For example,
the creditor may show you a release of a lien previously filed with your city or
county clerk's office to prove your house is no longer collateral. You must then
offer to return the creditor's money or property. If the creditor does not claim
the money or property within 20 days, you may keep it.
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