Many homeowners in the United States turn to home equity loans to handle big expenses related to their homes, medical care, school, or consolidating debts. Home equity loans are an option for Texas residents, but obtaining them is more difficult than in other places. Because of special laws in Texas, property owners sometimes have modified options and timeframes for taking out equity loans. Still, home equity loans are a useful option for several homeowners in Texas. 

Understanding Home Equity Loans in Texas

A home equity loan is a kind of loan that uses the homeowner’s equity to secure the loan. The equity means how much your home is worth minus the balance you still owe on your mortgage. These loans in Texas are sometimes called “Section 50(a)(6) loans” for the Texas Constitution section that regulates them.

This type of loan often provides you with everything upfront, at a fixed rate of interest, over a fixed period, and with monthly payments. Unlike a loan, a home equity line of credit (HELOC) is always open, giving you the ability to draw funds as you need them.

If you are using your home equity to fund renovations or construction projects, it’s essential to plan carefully. One way Texas homeowners and contractors improve accuracy in budgeting is by using the material takeoff services Texas specialists offer. These services help estimate the exact quantities and costs of materials needed for a project, essential when using borrowed funds to ensure you don’t overspend.

Legal Requirements for Home Equity Loans in Texas

Texas has more secure home equity lending rules than most other states. Their objective is to guarantee that borrowing is safe for homeowners and to shield their main residence from high risks. There are several important legal requirements, and these include:

Primary Residence Requirement

Texas law allows home equity loans to be taken out against your main residence, but not against any other property. You cannot use a second home, a rental unit, a vacation home, or an investment property. The borrower must intend the property as their main residence.

80% Loan-to-Value Limit

Homeowners can usually borrow as much as 80% of their home’s value, only after taking into account any current mortgage debts. With a $400,000 appraisal and $250,000 owing on the mortgage, the borrower could get a loan for up to $70,000.

Formula:

 $400,000 × 0.8 = $320,000

 Maximum loan amount: $70,000

There is a firm limit of 80% on all Texas home loans because it is a requirement set by the Texas Constitution to maintain equity for homeowners.

One Home Equity Loan at a Time

It is not allowed by Texas law for a homeowner to have more than one home equity loan at once on their primary home. If you have a home equity loan, you must pay it off in full before getting another one.

One Loan Can Be Taken per Year

Only a single home equity loan is permitted each financial year, even if a previous loan is paid off. With this rule, homeowners are prevented from taking out repeated loans and keep their debt under control.

Closing Must Occur at a Legal Office

A home equity loan’s closing must occur at the office of the lender, attorney, or title company. Because of this rule, borrowers get legitimate paperwork and are informed about important issues in a reliable way.

12-Day Disclosure Rule

The terms and legal rights associated with the home equity loan must be given to borrowers at least 12 clear days before the lender starts the loan process. The borrower takes this opportunity to know the loan details, clarify matters, and decide if it is worthwhile.

3-Day Rescission Period

When the loan is signed, borrowers get a three-day period to alter their decision, without facing any penalty. Under federal law (Truth in Lending Act), the cooling-off period lets borrowers take additional time to make their decision.

Types of Home Equity Loans in Texas

There are two main methods Texas homeowners can use to borrow money using their home equity.

Traditional Home Equity Loan

When you take out this loan, the full amount is given along with a fixed rate and the same amount each month for the agreed-upon term. It is suitable for anyone else who wants or needs a specific amount immediately for a known reason, for example, a renovation or a need for medical care.

A Home Equity Line of Credit (HELOC)

You can use a HELOC just like a credit card because it is a revolving credit line. With a home equity line of credit, homeowners can access money when needed, until their draw period ends, and then begin making payments for 20 years. These loans are available with adjustable interest rates and various repayment plans throughout the draw period.

HELOCs in Texas are regulated according to the same Section 50(a)(6) laws and must stick to all the rules and procedures required for home equity loans.

Benefits of Home Equity Loans in Texas

Even with the strict regulations, Texas homeowners can take advantage of home equity loans.

• Lower Interest Rates: Because the home is involved, these loans usually have better interest rates than regular personal loans or credit cards.

• Regular Repayments: Home equity loans often mean paying the same amount each month, which makes it easier to plan your finances.

• Large Loan Amounts:  Having home equity gives you the chance to secure several dollars for big purchases or important investments.

• Potential Tax Deductions: The interest on a home equity loan for home improvement projects may sometimes be deductible for taxes (talk to a tax advisor to check).

Risks and Considerations

While home equity loans might be a useful way to get funds, there are risks you should know about.

Foreclosure Risk: If a loan remains unpaid, the lender may foreclose because the home will be taken or sold to pay off the loan.

Reduced Home Equity: As you borrow more against your home, you take away from your equity, and it can make future efforts to refinance or sell more difficult.

Variable Interest Rates: As interest rates go up, monthly payments on HELOCs can increase a lot if you’re repaying the loan over several years.

Upfront Costs: When you are buying a home, don’t forget that you may have to pay thousands for closing costs, title fees, and an appraisal of the property.

How to Find a Lender in Texas

Banks and credit unions may not offer home equity loans in Texas because of the state’s complex legal environment. Be sure to select a lender that is familiar with Texas home equity loans. You can begin your search with local credit unions, regional banks, and mortgage brokers. It’s important to check rates, fees, the terms of the loan, and reviews from customers before choosing a lender.

Conclusion

Home equity loans for Texans are available when their situation matches the conditions set out in the state constitution. Despite these rules being more limiting than in other states, their purpose is to encourage sensible borrowing and protect buyers from loss of their homes. You should know the eligibility criteria, the mortgage amount you can get, and the laws that affect you before applying for a home equity loan.

Thoughtful planning, good financial understanding, and the help of an appropriate lender help Texas homeowners achieve important goals using their equity without putting their home at high risk.