Home equity loans and HELOCs in Texas

Equity is the part of your home you own outright: what it is worth, minus what you still owe on it. Two common ways to borrow against it are a home equity loan and a home equity line of credit, or HELOC. Either one is often a second loan that sits behind your current mortgage, so the first mortgage stays as it is. Dawn Futch compares options across a range of lenders, so the question becomes which one fits what you are trying to do.

A loan or a line

A home equity loan pays out once, at closing, and is repaid on a set schedule. It suits a cost you know up front, like paying off other debt or a single big purchase.

A HELOC sets a limit you draw from as needed, repay, and draw from again. It suits costs that arrive over time, like a remodel paid in stages.

The trade-off: the loan gives a known amount on day one, and you owe on all of it from the start. The line gives flexibility, and you owe only on what you have drawn, but each draw in Texas has a minimum.

The Texas rules for every home equity loan

These come from Section 50(a)(6) of Article XVI of the Texas Constitution, as summarized in the notice every Texas borrower receives:

• Every owner of the home, and each owner’s spouse, has to agree to the loan.
• The new loan plus everything else owed against the home cannot be more than 80 percent of the home’s fair market value on the day the loan is made.
• The loan is without recourse for personal liability against the borrower and spouse, unless the loan was obtained by actual fraud. The home secures it.
• The lien can be foreclosed only with a court order.
• Fees and charges to make the loan cannot be more than 2 percent of the loan amount. A third-party appraisal, a survey, the title insurance base premium with endorsements, and a title examination report are not counted in that 2 percent.
• No other property can be pledged as extra collateral.
• The loan can be paid off early without a penalty or charge.
• Only one of these loans can be secured by the home at a time.
• The loan cannot close until 12 days after the application is submitted or 12 days after the borrower receives the state’s notice, whichever is later.
• Unless the borrower agrees otherwise, it cannot close until one business day after the borrower receives a final itemized disclosure of the fees, points, interest, costs and charges.
• If the home secured the same type of loan within the past year, a new one cannot close until a year after that loan closed, except on request during a declared state of emergency.
• The loan closes only at the office of the lender, a title company or an attorney.
• The borrower can cancel within 3 days after closing without penalty or charge.

Extra rules for a HELOC

• Money can be drawn, repaid and drawn again during the draw period.
• Each advance has to be at least $4,000.
• Advances cannot be taken with a credit card, debit card or similar device, or with a preprinted check the borrower did not ask for.
• Any fees are charged only when the line is set up. There is no fee for an advance.
• The line, added to everything else owed against the home, cannot be more than 80 percent of the home’s fair market value on the day the line is set up.
• If the balance ever goes above that 80 percent figure, new advances stop until the balance comes back under it.
• The lender cannot change the terms of the line on its own.

How the 80 percent limit works, with round numbers

Take a home that appraises at $400,000. Eighty percent of that is $320,000, the most that can be owed against it in total.

If $250,000 is still owed on the first mortgage, the room left under the limit is $70,000. If $330,000 is still owed, the room is zero: the home already carries more than 80 percent of its value, and a Texas home equity loan or line is not available until that changes.

The limit is a ceiling, not an offer. What a lender actually extends can be less and depends on credit, income and the appraisal.

Good to have ready

• The current payoff balance of every loan against the home, including any older equity loan and the date it closed.
• Everyone on the title, and whether each owner’s spouse is available to sign.
• That the home is the homestead, the main residence.
• A rough idea of what the home is worth today. The appraisal sets the figure the 80 percent limit is measured against.
• What the money is for, and whether it is needed all at once or a piece at a time.

You do not need every document to start. Dawn can look at credit and income alongside the numbers on the home, and the paperwork gets gathered along the way.

If you do nothing

The equity stays in the home, and the home keeps the full Texas homestead protection it has now. Nothing about your current mortgage changes.

Common questions

How much equity can I borrow against in Texas?

The Texas Constitution caps it: the home equity loan or line, added to everything else owed against the home, cannot be more than 80 percent of the home’s fair market value. The amount a lender actually offers can be lower and depends on credit, income and the appraisal.

Why does a Texas home equity loan take at least 12 days?

The constitution sets a waiting period. The loan cannot close until 12 days after the application or 12 days after the borrower receives the state’s required notice, whichever is later.

Can I cancel a Texas home equity loan after closing?

Yes. The borrower can cancel within 3 days after closing without penalty or charge.

Can I use a HELOC with a card in Texas?

No. Texas does not allow advances on a home equity line of credit by credit card, debit card or similar device, and each advance has to be at least $4,000.

Does a cash-out refinance follow the same Texas rules?

Yes. Taking cash out of a Texas homestead through a refinance is made under the same section of the constitution, so the same 80 percent limit, waiting period and other protections apply.

Source: Notice Concerning Extensions of Credit Defined by Section 50(a)(6), Article XVI, Texas Constitution, Texas Finance Commission. That notice is a summary; the constitution itself governs.

Dawn Futch, NMLS #2090515. Mortgages by Dawn, Montgomery, Texas. Program guidelines vary by lender and change over time. Nothing on this page is a commitment to lend.