When interest rates are low, it’s natural to look around for a better rate. Refinancing a mortgage may not only lower your monthly payment, but can also save you thousands of dollars over the life of the loan. Depending on the lender, you may even get more incentives than a lower interest rate, too.
Still, trying to keep it all straight can get confusing at times, and you may wonder if you can back out of a refinance before closing, especially if you think you may have made a mistake. Here’s what you should know.
The right of rescission
Homeowners are protected by the right of rescission. As part of the Federal Truth in Lending Act (TILA), you have the right to cancel a refinance, as well as a home equity loan, up to midnight of the third business day after closing. Sundays and federal holidays are not considered business days.
In addition to the three-day cancellation clause, TILA also requires lenders to fully disclose all the costs associated with refinancing. This includes monthly payments, interest rates, and any other closing fees. These requirements were designed to protect homeowners from dishonest lenders and from buyer’s remorse. TILA cannot regulate lender rates, but is designed to offer consumers the ability to back out of a refinance before or within three days after closing if they are uncomfortable with the terms or simply want to cancel.
Why you might want to back out of a refinanced loan or home equity line
As a homeowner, there are several reasons you might consider backing out of a refinancing agreement before closing. The most common reason is you are offered a better deal. Interest rates can change from one day to the next. Not all lenders can offer the same rate and if you are able to find a better interest rate, it makes sense to go with the best terms.
Another instance in which you might consider backing out of refinancing is when the terms of a loan may have changed. This can happen for numerous reasons. Sometimes a loan with special terms is only available for a certain time period. If you don’t close on time and the new terms are not to your liking, you can cancel. Other times, you may not qualify for the loan you were interested in and you do not like the terms of another refinancing option.
Sometimes homeowners decide against refinancing if they have changed jobs or their income has been reduced due to other circumstances. When this type of cancellation occurs it is often when someone is refinancing and wants to roll in other bills to consolidate debt. If you do not feel you make enough to live comfortably under the new mortgage and payment, then you may decide to back out.
Consequences of backing out of a refinancing agreement
Keep in mind, even though you can back out of a refinance before closing, there may be fees involved. For example, if you have put funds down to secure a rate or have agreed to pay for an appraisal that has already been completed, you are still liable for these costs. However, these costs and penalties must be disclosed to you beforehand and during full disclosure. If they are not, then you are not obligated to pay them.
Whether you get cold feet and just don’t want to move forward, or you’ve found a better deal with another lender, it is your right as a consumer to be able to back out of a refinance before closing and up to three business days afterwards.
If you have questions or concerns about refinancing, your best bet is to consult with a mortgage expert. Refinancing a home should not bring you stress, but rather comfort in knowing you have gotten a good deal.