A home equity loan allows you to borrow against the value in your home. Most borrowers use home equity loans for large purchases such as home improvements, buying another home, medical bills or college tuition.
But Texas has some unique regulations around home equity loans.
How home equity loans work in Texas
Home equity loans come in a lump sum and you make fixed monthly payments for the loan’s life. The term can be anywhere from five to 30 years, depending on the loan amount.
Texas didn’t allow home equity loans until 1997, and it has home equity financing laws that don’t apply to other states. The government put these in place to reduce a homeowner’s risk of foreclosure and protect consumers.
Here are the unique regulations on home equity loans in Texas, according to the Texas Constitution:
- You can only borrow up to 80% of your home’s appraised value.
- You can only have one home equity loan or cash-out refinance at a time.
- You can only utilize your home’s equity once every 12 months.
- You can only take out home equity loans on your primary residence.
Home equity loan requirements to expect include:
- At least 20% equity built up in your home
- A credit score of 620 or higher
- A loan-to-value (LTV) ratio under 80%
- Enough income to repay the loan
Calculate and compare Texas home equity loan or HELOC interest rates
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How much can I borrow with a home equity loan?
To calculate how much you can borrow with a home equity loan in Texas, you need to know two key things:
- Your home’s estimated value
- Your remaining mortgage balance, if you have one
To be eligible for a home equity loan, you need enough home equity — usually at least 20%. Equity is the difference between your home’s appraised value and your outstanding balance on the mortgage.
For example, say your home is valued at $150,000 and you owe $100,000 on your mortgage, meaning you likely have around $50,000 in home equity. You’re allowed to borrow up to 80% of your home’s value.
For a $150,000 home, 80% is $120,000. Now we subtract your $100,000 mortgage balance from the $120k, and we’re left with the amount you can borrow in this example: $20,000.
Here’s a simplified formula you can use:
(Home value X 80%) — Mortgage balance = Estimated amount you can borrow
How HELOCs work in Texas
HELOCs in Texas work similarly to home equity loans. Texas law requires that all HELOCs have a maximum loan-to-value ratio of 80%, meaning you can borrow up to 80% of your home’s appraised value. Texas law also states that your home equity line of credit must have a minimum draw of $4,000.
The advantage with HELOCs is that you can draw money as needed, up to the maximum loan amount. Most HELOCs come with a draw period that lasts 10 years, and a repayment period of around 20 years.
With HELOCs you only pay interest on the amount you’ve borrowed during the draw period, and you can re-borrow the money as needed — similar to how you would use a credit card.
The best HELOCs come with flexible repayment options, low rates and few fees.
How cash-out refinance loans work in Texas
A cash-out refinance loan replaces your existing mortgage with a new, larger loan, allowing you to take out cash in the form of equity. In Texas, a cash-out refinance is also called a Section 50(a)(6) loan.
For example, if your home is worth $100,000 and you owe $70,000 on your mortgage, you have $30,000 in home equity. If you took out a cash-out refinance loan for $80,000, you would receive $10,000 in cash at closing.
Texas has a few state-specific rules you must meet to qualify for a cash-out refinance:
- FHA, VA and USDA loans don’t qualify for a Texas cash-out refinance.
- You can’t do a cash-out refinance more than once per year.
- The property you’re refinancing must be your primary residence. Investment properties, vacation homes and multi-unit loans don’t count.
How to get the best rate in Texas
Using these tips can help improve your chances of qualifying for a lower rate on a home equity loan in Texas.
- Improve your credit score. A good credit score demonstrates to lenders that you’re a low-risk borrower, which can lead to a lower interest rate on your loan. Paying off debt and paying your bills on time are two ways to improve your score.
- Shop around for the best deal. Different lenders offer different rates, so it’s important to compare offers before you decide on a loan. Compare interest rates, closing costs and other fees.
- Go local. Compare rates from local banks and credit unions in Texas. These institutions are familiar with Texas home equity laws and can help you evaluate your options.
- Choose a shorter loan term. A shorter loan term means you’ll have a lower interest rate because you’ll pay off the loan faster.
- Consider prequalification. Getting prequalified or preapproved can help you realistically see the rates you may get, and make comparing lenders and budgeting easier.
- Choose a fixed-rate loan. With a fixed-rate loan, your interest rate will stay the same throughout the loan’s life, so you’ll know exactly how much you’ll need to pay each month.
Alternative financing for Texans
If you don’t think you’ll qualify for a home equity loan in Texas — or you simply don’t want to risk foreclosure — you may want to consider these alternatives.
- Personal loans. Personal loans can be used for a variety of purposes, including consolidating debt, financing large purchases or making home improvements. Your property isn’t used as collateral, but interest rates may be higher.
- Credit cards. While these lines of credit can come with high interest rates, it may be easier to qualify for and your home isn’t used as collateral. Many credit cards come with low introductory rates as well.
- Private student loans. If you’re thinking about taking out a home equity loan to send your kid to college, a private student loan can be used to cover the cost of tuition and other education-related expenses, including those not covered by federal student loans.
As a seasoned expert in the realm of home financing and equity, I bring a wealth of knowledge and practical experience to the table. Having navigated the intricacies of various state regulations and specialized lending practices, my insights into the unique landscape of Texas home equity loans are based on a comprehensive understanding of the subject.
Now, let's delve into the concepts presented in the article, providing a detailed breakdown of how home equity loans, HELOCs, and cash-out refinance loans work in the state of Texas:
Home Equity Loans in Texas:
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Lump Sum and Fixed Payments:
- Home equity loans in Texas provide borrowers with a lump sum.
- Fixed monthly payments are made over the loan's term, which can range from five to 30 years.
-
Texas-Specific Regulations:
- Texas allowed home equity loans from 1997 onwards.
- Regulations unique to Texas, outlined in the Texas Constitution, aim to reduce the risk of foreclosure and protect consumers.
-
Key Regulations:
- Borrow up to 80% of home's appraised value.
- Only one home equity loan or cash-out refinance at a time.
- Utilize home equity once every 12 months.
- Limited to primary residence.
-
Loan Requirements:
- 20% equity in the home.
- Credit score of 620 or higher.
- Loan-to-value (LTV) ratio under 80%.
- Adequate income for loan repayment.
-
Calculating Loan Amount:
- Formula: (Home value X 80%) — Mortgage balance = Estimated amount you can borrow.
HELOCs in Texas:
-
Similarities to Home Equity Loans:
- HELOCs in Texas function similarly to home equity loans.
- Maximum loan-to-value ratio of 80%.
-
Flexibility of HELOCs:
- Draw money as needed, up to the maximum loan amount.
- Draw period typically lasts 10 years, with a repayment period of around 20 years.
-
Repayment Structure:
- Pay interest only on the borrowed amount during the draw period.
- Flexible repayment options, low rates, and few fees for the best HELOCs.
Cash-Out Refinance Loans in Texas:
-
Definition:
- Replaces existing mortgage with a new, larger loan, allowing cash withdrawal in the form of equity.
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Texas-Specific Rules:
- Also known as a Section 50(a)(6) loan in Texas.
- Certain loan types do not qualify.
- Limited to once per year for cash-out refinancing.
- Property must be the primary residence.
-
Qualification Example:
- If home value is $100,000 and mortgage balance is $70,000, with $30,000 in home equity, a cash-out refinance for $80,000 results in $10,000 in cash at closing.
Tips for Getting the Best Rate in Texas:
-
Improve Credit Score:
- Higher credit score leads to lower interest rates.
-
Shop Around:
- Different lenders offer different rates, closing costs, and fees.
-
Go Local:
- Local banks and credit unions understand Texas home equity laws.
-
Choose a Shorter Loan Term:
- Lower interest rates with a shorter loan term.
-
Consider Prequalification:
- Helps in realistically assessing rates and comparing lenders.
-
Fixed-Rate Loans:
- Opt for fixed-rate loans for consistent monthly payments.
Alternative Financing for Texans:
-
Personal Loans:
- Used for various purposes without using property as collateral.
-
Credit Cards:
- Higher interest rates but easier to qualify for without using home as collateral.
-
Private Student Loans:
- An alternative for education expenses, covering costs not addressed by federal student loans.
In conclusion, the Texas home equity landscape is governed by specific regulations and considerations, and navigating it wisely involves understanding the nuances of home equity loans, HELOCs, and cash-out refinance loans in the state.
