Home Equity Loans and HELOCs in Texas

Every state has unique rules and restrictions regarding home financing. Texas is no exception.

In the Loan Star State, if you want to liquidate some of your home’s accrued equity, laws limit how much you can cash out and when you are allowed to tap into it. While these rules may appear stricter than normal, they are in place to cushion Texas homeowners against over-leveraging their properties.

Take a moment to better understand different ways to tap into your home equity in Texas, various home equity rules in Texas, their pros and cons, and more.

Ways to tap into Texas home equity

As in any state, there are three primary ways to use your home equity in Texas: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

Home equity loan

A home equity loan is a separate, second mortgage loan on your home. Home equity loans are lump sum installment loans, where the entire loan amount is provided upfront, and you repay it through equal monthly installments until the balance is fully repaid.

Home equity loans function similarly to standard home loans, typically featuring fixed interest rates and fixed monthly payments. The loan terms can range from 10-to-30 years. Home equity loans often prove appealing due to their typically lower interest rates compared to other forms of debt, such as credit cards and personal loans.

However, it is crucial to note that your home serves as collateral for the loan, and failing to make loan payments could potentially lead to foreclosure.

Home equity line of credit (HELOC)

A HELOC provides an alternative method to tap into the equity of your home without going through the process of refinancing or taking out a home equity loan. It functions more like a credit card.

With a HELOC, you have access to a predetermined borrowing limit, and you can borrow from it, repay the amount, and borrow again as needed. HELOC interest rates are adjustable, meaning they can fluctuate throughout the loan duration.

However, you are only required to pay interest on the actual amount you borrow from your HELOC, not on the entire credit line available to you.

Cash-out refinance

Through a cash-out refinance, you have the opportunity to replace your existing primary mortgage loan with a new one that is larger in size.

The difference between the new loan amount and your previous loan is given to you as cash during the closing process. Cash-out refinancing grants you the ability to utilize the equity built up in your home for any purpose you desire.

It presents a favorable option for obtaining a significant sum of money at a potentially lower interest rate than a home equity loan or HELOC.

Texas home equity laws are stricter than normal

The state of Texas has a robust regulatory framework in place designed to safeguard consumers and homeowners. Being a more financially conservative state than others, Texas has instituted specific restrictions on home equity.

“Texas’s laws are indeed more stringent compared to other states,” said Min Hwan Ahn, a real estate attorney. “The purpose of these rules is to protect homeowners from being loaned more money than what their house is worth.”

Lauren Mendoza, the founder of Bank Standard, agrees.

“These laws are designed to prevent homeowners from over-leveraging their properties and falling into financial distress. They reflect Texas’s historically conservative approach to borrowing and property rights, which are intended to minimize foreclosures and shield homeowners,” Mendoza said. “Understanding these laws can help Texas homeowners make informed financial decisions.”

Texas home equity laws

Several home equity rules apply that homeowners and lenders should be aware of. Here’s a rundown.

Rule #1

In Texas, you can only take out up to 80% of your home’s equity, which means up to 80% of your property’s appraised value. You must retain at least 20% equity in your home.

For example, say your home is worth $300,000 and your outstanding mortgage balance is $80,000. The max equity you could liquidate in this example would be $160,000 ($300,000 x 80% - $80,000).

But if you paid off that $300,000 mortgage entirely, the most equity you could cash out would equate to 80% of the home’s value, or $240,000.

Rule #2

You are only allowed to take out a home equity loan on your primary residence (a one- to four-unit home) in Texas. That means you cannot pursue a home equity loan on an investment property, second home, or rental property.

Rule #3

Only one home equity loan is allowed at a time in Texas. You must pay off your existing home equity financing before you are permitted to get another home equity loan.

Rule #4

Furthermore, you can cash out home equity only one time every 12 months. This is true even if you have fully repaid your last cash-out refi or home equity loan.

Rule #5

A mandatory waiting period is required, too, to permit necessary due diligence and understanding of your rights as a borrower. Specifically, home equity financing is not allowed to be finalized any sooner than 12 days from the date of application.

Other related rules

Closing on a home equity loan must be conducted exclusively at the permanent office of a lender, lawyer, or title company, and the actual borrower must be present at closing.

Borrowers are given a grace period of 3 business days after closing, during which they can cancel the loan without fees or penalties. Borrowers are allowed to use their liquidated home equity funds for any lawful reason, as well.

In addition, home equity loans cannot be converted into any other type of loan, but they can be paid off in full prior to their scheduled due date without any extra fees or penalties assessed. Also, the lender cannot obligate the borrower to pay off the loan earlier than agreed to due to a default on a different loan or a decrease in home value.

Lender rules to be aware of

Restrictions are also in place for lenders, which borrowers should be cognizant of.

First, lenders are required to provide borrowers with an itemized breakdown of all costs, including fees, points, principal, and interest, at least one day before the loan’s closing date. However, you can waive this rule via written consent if you prefer.

Second, lenders are capped at charging a max of 2% in fees based on the loan amount. This ceiling pertains to the loan’s principal and doesn’t include fees for appraisals, surveying, or title services. Additionally, lenders are not allowed to demand extra collateral/assets beyond your home, including automobiles, prized collections, or boats.

Lastly, lenders have to be authorized, which means they must possess a license to offer home equity financing.

Pros and cons of these Texas home equity rules

The primary benefit of many of these Texas laws is that they provide a financial safety net, preventing homeowners from getting into financial hot water with their home equity.

“Logically, these rules might seem restricting. But during a market downturn, they can protect homeowners from being left with a loan more significant than their home’s value,” Ahn said. “Imagine if the market crashes as it did in 2008; if that happens, these laws can prevent a lot of heartaches.”

The obvious drawback of these restrictions “is that Texas homeowners might not be able to tap into as much of their equity as homeowners in other states – potentially limiting their financial flexibility,” said Mendoza.

The bottom line

From a distance, some of these Texas regulations may appear onerous, excessive, and perhaps unfair. Then again, these rules include numerous safeguards that prevent Texas homeowners from making home equity decisions they could later regret.

“I believe these Texas rules and laws benefit and protect homeowners and borrowers more than they limit them,” said Gagan Saini, the Texas-based CEO of JiT Home Buyers. “They provide an extra layer of protection and ensure that borrowers are not taking on more debt than they can afford to pay back. My advice is to make sure you fully understand the laws and rules before pursuing a home equity product in Texas.”

If you’re a Texas homeowner who wants to tap your property’s equity, reach out to a local lender today.