Not all home loans are created equal. The process differs state by state, but one thing is consistent across all applications – a homeowner has worked hard to build up equity that they want to liquidate and use. They might be looking to:
- Pay off other debt
- Buy an investment property
- Fund home improvements
- Cover a large expense
Those are just a few examples.
Some states are relatively lax about homeowners borrowing against their equity, but Texas is serious about protecting people's property. Since the days of the Castilian settlers, Texans have resisted attaching debts to homesteads. It wasn't until 1997 that the Texas legislature even approved home equity lending, which in the Lone Star State is known as a 50(a)(6) loan.
Getting a Home Equity Loan in Texas – The Common Options
Texas allows both standard forms of home equity lending, the home equity loan and home equity line of credit.
The home equity loan, or HELoan, is a lump sum loan with a fixed interest rate. You pay the same amount every month for a specified period of time.
The home equity line of credit, or HELOC, works more like a credit card. The lender approves you to borrow a certain amount and you can draw from it as you need, provided that you make agreed-upon repayments. The interest rate is adjustable, meaning that it shifts with the market, but you pay interest only on the amount you owe.
If you're a long time Texas resident, you might already know that the HELOC has only been available in your state since 2003.
Home Equity Loan Requirements in Texas
Unsurprisingly, Texas still has relatively strict regulations for home equity lending. Here are some of the most relevant for you as a homeowner.
Whether you have an HELoan or a HELOC, the amount you borrow cannot exceed 80 percent of your home's fair market value.
For example, if you have a home valued at $200,000 and it's fully paid off, you can borrow 80 percent of $200,000, which comes out to $160,000.
On the other hand, if your home is valued at $200,000 and you still owe $120,000:
- Your total equity is $120,000, but
- You're only legally allowed to borrow $96,000.
Be aware that you don't have to take all of your approved borrowing amount. If you only need $50,000 to build an addition, only borrow that much.
Before January of 2018, lenders couldn't charge fees of more than 3 percent on home equity loans and HELOCs. Since then, however, a change to the Texas state constitution has reduced the fee cap to 2 percent.
The reduced cap doesn't include fees for appraisal, surveying, or title examination. It also doesn't apply to title insurance premiums. Because these exclusions are new, make sure your lender covers all of your costs with you thoroughly.
One loan limit
Each homestead can only have one equity loan outstanding at a time. Therefore, if you've taken out a home equity loan or HELOC, you must pay it off fully before taking out another loan. The law also restricts you to one home equity loan or HELOC per year, even if the prior loan is repaid in full.
Rules for Lenders
As a borrower, you should know a bit about the restrictions that home equity lenders in Texas have to follow. For example:
- You must be allowed to repay early or in balloon payments without penalty.
- Lenders cannot mandate what you do with your cashed-out equity.
- Lenders cannot accept any other asset as collateral on a home equity loan.
- Lenders must provide you formal notice of your rights as a borrower and wait 12 days before closing on the loan.
- You have the right to cancel without charge up to three days after closing.
During the Great Recession in 2007, these restrictions and others helped Texas to sustain a home price index decline of just 1 percent while the national index fell 20 percent. The law continues to protect homeowners while still providing them with access to their earned equity.
Home Equity Loan Rates in Texas
Your rate for a home equity loan or HELOC will depend on when and where you apply. Rates for a HELOC, as of April 2019, range from around 5 percent to just above 7 percent through such lenders as:
- Randolph Brooks Federal Credit Union (5.0% APR, $0 minimum initial draw)
- Washington Trust Bank (6.0%, $0 minimum initial draw)
- BBVA Compass Bank (7.06%, $0 minimum initial draw)
Home equity loan rates for 10-year terms average 6.13 percent but have a similar range. Opportunities include:
- Randolph Brooks Federal Credit Union (4.2%, average monthly payment $510.99)
- Broadway Bank (5.490%, average monthly payment $543)
- Prosperity Bank (6.875%, average monthly payment $578)
Of course, as with any loan, your interest rate and monthly payment will vary based on your finances. If your credit score is low, expect to pay higher interest rates.
Can't Get a Loan?
If you're looking at home equity loans in Texas and have bad credit, a score below 620 as a general rule, you might have trouble getting a home equity loan at all. Again, that restriction is the state protecting you from likely default.
Remember, with a home equity loan or HELOC, your property is your collateral. If you default on a home equity loan, you could find yourself losing a home and lacking the credit score to qualify for another.
Home Equity Loan Alternatives
Don't give up – there are still ways for you to tap your home equity. If you're 62 years old or older, you can get a reverse mortgage, which lets you cash out your equity with no strings attached. The program has helped many older adults make ends meet, but be careful – once you spend that money, it's gone.
There's also a relatively new option known as a sale-leaseback. A prime example is EasyKnock's Sell and Stay program, which enables you to sell your home, collect the equity, and remain in place as a tenant until you're ready to relocate or re-purchase the home.
It's your equity. Make it work for you.
EasyKnock's Sell and Stay program is a win-win for many homeowners. You get your equity without interest attached, and you don't have to move out of the home you love. It's an arrangement that was once unprecedented, but it's completely in the spirit of Texas's commitment to protecting homeowners. Contact EasyKnock and find out how to get started.