Can You Back Out of a Refinance Before Closing?

Homeowners frequently consider whether they can cancel a refinance agreement after signing documents but before the loan closes. It is generally possible to cancel a refinance, as federal law provides specific consumer protections for such transactions. Understanding these rights and the proper procedures is important for anyone considering a refinance.

Understanding Your Right to Rescind

The legal foundation for canceling a refinance is found in the Truth in Lending Act (TILA), which established the Right of Rescission. This provision serves as a consumer safeguard, offering a “cooling-off” period to review the terms of certain credit transactions. Its primary purpose is to protect consumers from potentially unfavorable loan terms by allowing them to withdraw from the agreement.

This right typically applies to credit transactions where a security interest is taken in a consumer’s principal dwelling, such as most mortgage refinances on owner-occupied primary residences. However, this right does not extend to all home loan transactions. It generally does not apply to a mortgage taken out to purchase a home, a loan on an investment property, or a second home. In some cases, if you refinance with your current lender, the right may only apply to any new cash-out portion of the loan.

Lenders are required to provide specific disclosures related to this right. Each person with an ownership interest in the property must receive two copies of the “Notice of Right to Cancel” form. This notice outlines the consumer’s right to rescind, the procedure for exercising it, and the date the rescission period expires. These disclosures are a prerequisite for the rescission period to begin.

Exercising Your Right to Cancel

The rescission period for a refinance typically lasts for three business days. This period begins after the last of three events has occurred: the signing of the credit contract, the receipt of the Truth in Lending disclosure (often the Closing Disclosure form), and the receipt of two copies of the Notice of Right to Cancel. For rescission purposes, “business days” include Saturdays but exclude Sundays and federal public holidays.

To cancel the refinance, notification must be in writing. Consumers should use the Notice of Right to Cancel form provided by the lender, or draft their own letter stating their intent to rescind. Send this written notice to the lender before midnight of the third business day. Sending the notice via certified mail with a return receipt requested provides proof of delivery, or hand-delivery with a signed receipt can also serve as evidence.

Once a valid notice of cancellation is received, the lender has obligations. Within 20 calendar days of receiving the notice, the lender must return any money or property received from the consumer. The lender must also terminate their security interest in the property, releasing the lien that would have been placed by the new refinance.

Financial Implications of Cancellation

When a refinance is cancelled through the Right of Rescission, fees already paid are addressed. Many fees, particularly those paid directly to the lender or for services not yet fully rendered, are refundable. This includes processing fees or origination charges. The intent of the Right of Rescission is that the consumer should not incur financial penalties for exercising this right.

However, some fees may not be refundable if the associated service has already been completed by a third party. Appraisal fees are non-refundable if the appraisal has been conducted. Fees for title searches or credit reports, where the service has been performed, may also be non-refundable. Consumers should review their Loan Estimate and Closing Disclosure documents, which outline fee details and potential refund policies.

A successful cancellation ensures the original mortgage remains in effect. There is no disruption to the existing loan terms or payment schedule. Homeowners must continue making timely payments on their original loan to avoid late fees or negative impacts on their credit.