Most refinancings and second mortgages, but not original purchase mortgages, must include a paper telling you that you can cancel the loan within three days of the closing. This is a critical right of rescission you have under federal law.
The three days can be extended up to three years if the notice was not completed correctly or if you did not get two copies per borrower – four, if married. Massachusetts law allows extension up to four years.
You rescind by a writing to the lender. It is helpful to use the supplied form, but you can write a letter if the form is lost. The letter must be sufficiently detailed.
The lender must release the mortgage, and then you must repay the principal amount of the loan. You do not have to repay any interest or closing costs, and you get credit for the payments you made. Suddenly, you own mortgage-free property.
A court has the authority to change this procedure if appropriate. In bankruptcy, courts are all over the board on making changes to the procedure. Some do not, some say the repayment must be at the same time as the mortgage release, some say the repayment is a dischargeable unsecured debt just like credit cards, and some say you can have up to the life of the mortgage to make the repayment and without any added interest.
Rescission is a powerful weapon. If exercised before a bankruptcy is filed, a settlement may be reached to allow a new refinancing at more affordable terms so bankruptcy is avoided entirely.
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