The Truth in Lending Act and How It Can Help a HELOC Borrower
Many homeowners borrow money against their home equity without knowing all the facts first and end up losing their property altogether.
So while taking out a HELOC has its inherent risks, the first step to minimize these risks is to get all the relevant information first. As far as home equity loans are concerned, that means knowing everything – including the fine print.
The Right to Information under the Truth in Lending Act
One of the things that you should definitely brush up on when entering into a home equity or any loan agreement for that matter, is the federal Truth in Lending Act which outlines all the rights that a borrower is entitled to.
First and foremost, the law requires that prior to the signing of any loan documents, all pertinent information regarding the loan must have been disclosed to the borrower. Further, the disclosures must be conspicuous, perfectly understandable and not hidden under any fine print or unrelated information.
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The Important Disclosures
The disclosures may be included in the application forms or detailed in a separate paperwork. Among the information that the bank or lending institution should disclose are:
- The duration of the draw period
- The duration of the repayment period
- A clear explanation of how the payment amounts are determined
- The schedule of the payments
- Indicators used for any interest rate adjustments
- The frequency of Annual Percentage Rate (APR) adjustments
- The fees charged by the lender
- Any fees charged by third parties
- An explanation of how negative amortization works
- Requirements for the loan transaction
- Tax benefits and obligations
- Implications of an adjustable rate loan
Study the above disclosures carefully and ask for additional information if anything is unclear to you. As much as possible, make a copy of the document that lists all these facts and figures. Provided you are able to submit your application form and meet all requirements within the time frame given, the lending institution is bound by law to adhere to the rates and terms initially released. Otherwise if any changes to the conditions are made, you can opt out of the loan and receive a full refund of all fees paid.
The data you get on rates, fees, and other information will serve as a sound basis for your decision if you are undecided about whether to avail of a HELOC or are still looking for the lender that can give you the most advantageous deal.
The 3-Day Right of Rescission
In case you’ve already affixed your signature along the dotted line only to change your mind a few hours later or if you find a better deal with another lender, don’t worry. You can still back out of a HELOC (and a few other types of home loans) by way of the right of rescission which is also provided for in the Truth in Lending Act.
With this provision, you can actually back out of the loan no questions asked and without any penalties. But you have to decide fast, as you only have 3 business days within the signing of the loan documents to cancel. As soon as you indicate your intention to rescind the loan in writing, the lender has 20 days to release its claim on your home as collateral and pay you back any fees you have given.
The right of rescission, however, does not apply to all mortgages. In the case of a home equity line of credit, it is only applicable if the borrower’s primary residence is used as the collateral. At the same time, it’s also possible to waive this right and get the money immediately if the borrower can establish that the loan is needed for emergency purposes.
It is essential that as a borrower, you have access to all the information you need. And this privilege is given to the consumer in the Truth in Lending Act. Make an informed decision on your HELOC by making use of this right.
Simon Zhen is the senior research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.
Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.