Disclosures, How It Works, Your Mortgage File

The Right of Rescission

Three weeks ago, one of our borrowers exercised the right to rescind.

Most will never exercise this right but should be aware of the details in the event it is needed

The right of rescission applies to several different types of credit, but for our purpose today, I’m referring to closed end credit “in which the security interest is or will be retained or acquired in a consumer’s principal dwelling” (FIDC§ 226.23). In other words, the refinance of your primary residence.

What is the right or rescission?

The right to rescind allows each “consumer whose ownership interest is or will be subject to the security interest” the right to rescind or cancel the transaction. If, after signing your mortgage documents, you desire to cancel the transaction, you have until midnight of the third business day to do so.

When you sign your loan closing documents, you will receive several copies of the right to cancel. I’ve posted a copy to the right. It outlines your right and how to cancel should it be necessary.

Why would you cancel?

I’m sure there are many reasons although in my ten years I’ve witnessed it only twice.

Why?

First off, the process of refinancing can take several weeks, if not months. This leaves plenty of time to determine whether or not refinancing is the right decision. Most will cancel well before consummation of the loan.

Second, regulations require lenders to disclose early on and then obligates them to those charges –within certain tolerance. The right or rescission was intended to provide an escape when a borrower found themselves in a bait and switch – were the terms in the beginning are different than at the closing table.

What happens now that you have rescinded?

Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

In most cases, your lender will require you to wait the three days before they fund the loan. In other words, they will not payoff your previous lender or record the mortgage. The transaction simply dissolves, no questions asked.

Below is a link to the regulation that outlines this right.

FDIC. Law, Regulations, Related Acts § 226.23 Right of rescission

<http://www.fdic.gov/regulations/laws/rules/6500-1400.html >
photo credit: thinkpanama via photopin cc

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Disclosures

What is APR?

The topic of APR is broad. So, I’m going to give you the explanation I use with my borrowers. To start with, APR stands for Annual Percentage Rate and for clarification, it is NOT an interest rate, it’s the total cost of the loan expressed as a rate.  Many people confuse APR for the interest rate and mistakenly believe they are going to be charged interest based on the APR.

Let’s do an example:

TIL

If I lent you $100,000 and the only thing I charged was interest at a rate of 4% then the cost of the loan would be $71,869 (over a 30 year term). In this case, the APR would also be 4%.  Again, the only thing charged was interest so the APR would equal the interest rate.

Now, let’s say I charged you 4% interest plus an origination fee of $1,000. Now the total cost of the loan is $72,869 (71,869 interest + 1,000 origination fee).  Now the APR would higher at 4.083% because it’s the cost of interest (4%) plus the origination fee.

So when you are shopping for a loan, remember that APR is not your interest rate, it’s a rate that is designed to help you see the total cost of the loan.  So as you shop for your mortgage, remember to compare the interest rate to the APR.  The greater the difference between the interest rate and APR, the greater the potential cost.

APR can be confusing so if you have questions, let me know. 

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