Every state has different regulations and requirements for home lending. Learn about cash out refinancing in Texas in this guide.
What if you could attend the closing on a home loan and leave with money in your pocket in addition to that heavy pile of signed documents? This is the promise held out to borrowers interested in a cash out refinance.
If you’ve got equity in your home and need a Texas cash injection to meet your financial goals, you may be considering this refinance option, especially given current low-interest rates. Perhaps you want a cash out refinance for home improvements. Or maybe, a cash out refinance to buy a second home sounds like a good idea.
While Texas cash out refinancing can be a good fit for some homeowners, anything that sounds too good to be true demands a close look at the fine print. Is this refinance option right for you? In this short guide, we’ll explain the ins and outs of refinancing in the Texas state.
Does Texas Allow Cash-Out Refinancing?
If you own a home, you’re probably used to getting an endless stream of refinancing offers in your mailbox.
A refinance replaces your current mortgage with a new personal loan on new terms. You may be tempted by offers of lower interest rates and reduced monthly mortgage costs. Meanwhile, lenders are in the market to earn the up-front costs that go hand-in-hand with any new loan.
Texas allows cash-out refinancing, which enables you to take out a personal loan for more than you owe on your current home. Texas homeowners can use that money to pay off the existing mortgage while pocketing the difference in cash.
However, keep in mind that Texas has some specific rules and regulations around Texas cash out refinances.
Texas Laws on Cash Out Refinancing
Cash out refinancing is also referred to as a “Section 50(a)(6) loan” in the Lone Star State. Texas cash out refinance guidelines aren’t as strict as they were before 2018, but they still exist.
Texas refinance laws are as follows:
- The total mortgage loan amounts cannot be for more than 80% of the property value.
- Closing costs charged by lenders can’t be more than 2% of the loan amount.
- All mortgages, liens, and home equity lines of credit must be paid off with the new homestead property loan.
There are also wait times mandated. Borrowers are eligible:
- Six months after a standard mortgage
- 12 months after a previous cash out refi
- Four years after a bankruptcy or short sale
- Seven years after a foreclosure
How to Get a Cash-Out Refinance in Texas
Are you eligible for a cash out refinance in Texas? The next step is understanding the steps to secure this kind of home loan.
Throughout the process, keep your financial goals at the forefront of your mind. If at any point you realize your refinance will result in one-time or monthly costs that exceed your budget, it’s okay to terminate the process and investigate other options.
Wondering how to do a cash out refinance in Texas? The steps to refinancing are as follows:
Step 1: Understand How Much You Can Take Out
While in most states, lenders limit cashback to 80% of your current equity, in Texas, loans are also limited to 80% of the home’s value.
For example, if your Texas homestead is worth $300,000, and you still owe $200,000 on your first mortgage, you can borrow up to $240,000. That amount covers the remainder of your mortgage ($200,000) plus a total amount no larger than 80% of your home’s value (80% of $300,000 is $240,000).
You’ll be paying interest on the total amount you borrow, so keep in mind that you don’t have to take out the maximum amount of cash.
Step 2: Shop Offers
Not all refinances are created equal. Taking out a larger mortgage loan will add to your overall debt. This may not be a good financial decision, especially if the conventional loan terms are less favorable than those on your current mortgage.
Shop for the best deals in terms of:
- Closing costs – While Texas caps the maximum closing cost at 2% of the loan value, look for the best offer. If you can’t pay your closing costs out of pocket, you’ll need to roll them into the loan and pay interest on the total amount.
- Interest rates – Compared to standard mortgages, you’ll pay up to a 0.25% higher interest rate on a cash out refi. Look for the lowest interest rate available.
Step 3: Get an Appraisal
To determine your home’s current market value, you can start with a quick estimate using an online calculator, but you’ll need to hire an appraiser for an official number that both you and the lender agree on.
If the appraised value isn’t as high as you were expecting, you can end the refinance process. You’ll only be out the cost of the appraisal (usually around $500).
Step 4: Complete the Paperwork
If everything looks good, you’ll need to finalize your conventional loan application by providing your bank with the following:
- Proof of income
- Tax returns
- Recent banking statements
- Authorization to check your credit
- Information about your current debt
They’ll use this information to underwrite the homestead property loan. If you encounter any problems at this stage, keep in mind that you have other options for accessing your home equity.
Step 5: Spend Your Cash
If all goes well, your finance will be approved, and you’ll close on your new loan.
There are no Texas or federal regulations or lender limits on how you can use the cash proceeds of your loan. Cash out refinancing is often used for:
- Major property repairs and upgrades
- Medical expenses such as prepaying a surgery
- Investment opportunities
- College expenses
What you want to avoid is mortgaging your property and using the proceeds in a way that only supports your monthly living costs, or contributes to a cycle of reloading (loans to pay off loans).
A Better Way to Access Your Home Equity in Texas
A cash out refinance comes with costs and roadblocks that not every homeowner can pass. But if you’ve invested your earnings in a house, you can still achieve the goal of remaining in your home while accessing the equity you own in it.
If you’re considering a cash out refinance or other consumer loans, consult with a financial advisor to learn more.
Key Takeaways
What if you could attend the closing on a home loan and leave with money in your pocket in addition to that heavy pile of signed documents? This is the promise held out to borrowers interested in a cash out refinance. If you are still unsure of options to refinance after reading this article, consult a financial advisor to discuss your options.
Sources:
- The Mortgage Reports. Texas cash-out refinance guide: 2021 Rules and requirements. https://themortgagereports.com/41538/texas-cash-out-refinance-new-laws-you-need-to-know
- NextAdvisor. Why Refinancing Might Be Your Best Option to Fund Home Improvements Right Now. https://time.com/nextadvisor/mortgages/refinance/home-improvement-refinance/
