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Terms and Lingo

Three Day Right of Rescission & Funding

Image credit http://corrupteddevelopment.com/hourglass-timer-icon-psd/Rescission

Most homeowners have heard about the three-day rescission – or three day right to cancel – but do not fully understand how it works. The three-day rescission, mandated by the Federal TILA (Truth in Lending Act – 1968), allows you time to review all of your documents after closing on a refinance of your primary residence to make sure the loan you signed for at closing is the mortgage you were promised earlier in the process.  This serves to protect homeowners from high-pressure-sales and bait-and-switch tactics used by some mortgage originators.

Prior to 2010, this was extremely important as lenders & originators were not held to the same strict disclosure standards that we are today; before 2010, it was completely legal, though not at all ethical, for a lender/originator to show up to the closing with a loan package very different than what had been disclosed to the borrower earlier in the process.  Today, it still is a great accountability tool, but it’s impact isn’t as far reaching (one loan being canceled by a consumer in the three days post-signing) as the fines and penalties that would be assessed to a lender or broker who is not compliant with the new rules.

As it stands, once you sign your loan documents for your primary residence refinance, the three-day wait time starts the first day in which mail is delivered (i.e. Monday through Saturday, except Federal Holidays) after you sign.  You then have until midnight on the third day in which mail is delivered to cancel your loan for any reason; the funds will then be disbursed the following business day (M-F).

Examples: Sign Monday, cancellation days are Tuesday through Thursday, funds disbursed Friday. Or, sign Thursday, cancellation days are Friday, Saturday & Monday,  funds disbursed Tuesday.

The law requires that you are notified about this Right to Cancel with two copies of the form.  If you decide to take advantage of rescission you will need to fax the written cancellations to your mortgage broker (if any), lender, and title company involved with your loan.

Funding

The loan “funds” the day that the money is disbursed from the lender to the title company. With a purchase of any property and the refinance of any property other than your primary residence, your loan will fund the same day that you sign the closing documents. For a refinance of your primary residence, your loan will fund the next business day (Monday -Friday) after your three-day rescission period has expired.

APR and Note Rate

What is the difference between the interest rate and the APR?

You’ll see an interest rate and an Annual Percentage Rate (APR) for each mortgage loan you see advertised. The easy answer to “why” is that federal law requires the lender to tell you both.

The APR is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate. This way, lenders can’t “hide” fees and upfront costs behind low advertised rates.

While it’s designed to make it easier to compare loans, it’s sometimes confusing because the APR includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the APR does not clearly define what goes into the calculation, APRs can vary from lender to lender and loan to loan.

The APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make — that’s why they’re variable rate in the first placed!

So, APRs are at best inexact. The lesson is that APR can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Note when you’re browsing for loan terms that the APR will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you’ll see that APRs on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.