What are the Rules and Laws in Texas for Home Equity and HELOC Loans?
If you live in Texas and own a home, you may want to take out equity for a major purchase, such as home renovations. In the Loan Star State, you can get a home equity loan or HELOC to access the cash you need, but there are certain rules that lenders must follow that are outlined in Texas law. Below, learn more about HELOCs and specific rules for these home equity loans in Texas.
Rules for HELOCs In Texas
Many mortgage companies have decided they do not provide home equity credit lines and 2nd mortgages in Texas because they do not want to maker separate guidelines for one of fifty states.
Since the state of Texas continuously has a booming economy, home values increase significantly, even high than national averages, therefore the mortgage lenders that are refusing to approve home equity loans in Texas are missing out on lending to good borrowers.
Like all states, you can get a HELOC in Texas, but the state has several rules that lenders must follow when providing home equity loans to TX homeowners:
Cannot Borrow More Than 80% of Home Equity
First, the law states in Texas that you cannot borrow more than 80% of the home’s equity. The purpose of this law is to prevent the owner and lender from taking too much risk. So, if your home is worth $200,000 and don’t have a mortgage, the most you can borrow with a HELOC is $160,000. If you still owe $60,000, you would only be able to borrow $100,000.
This law is in place to avoid a situation where people borrow too much home equity, can’t make the payments, and then default. This problem is in part what caused the mortgage meltdown and recession of 2008.
Some lenders will allow you to borrow more than 80% of your home’s equity, but this isn’t allowed in Texas. Even in 2024, most lending companies do not offer home equity loans in Texas.
You Can Have Only 1 HELOC
Texas law also states that you can only have one HELOC or home equity loan at a time. If you want to get another HELOC, you have to pay off the first one.
Only 1 HELOC Every 12 Months
If you repay the first HELOC, you can only tap the equity one time per year. This is important to remember if you think you will need to get another loan in the near future.
The HELOC Cannot Close Sooner Than 12 Days From The Application
There are requirements in Texas regarding fact checking the loan, so a HELOC cannot legally close any sooner than 12 days after you apply and receive a notice of your rights as a borrower.
However, most lenders take at least 30 days to close a home equity loan. This is important to remember if you need the money as soon as possible. If you need to close your loan quickly, talk to your lender and make sure you provide all of the documentation they need as soon as you can.
Texas HELOCs Are Only Allowed On Primary Residences
Do you want to take out a HELOC on a rental property? In Texas, you can only take out a second mortgage on the property you live in. The state wants to prevent people from taking out loans on homes they don’t live in and defaulting.
There also are several rules in place for lenders in Texas:
Lenders Can Only Charge Up To 2% In Fees on Texas HELOC Loans
The law caps lender fees on second mortgages to 2% of the principal. This does not include appraisal, survey, and title fees. The lender also must give you a detailed list of fees you are being charged to close the loan.
Other Collateral Cannot Be Required
The collateral for your HELOC is the home itself. The lender cannot require you to provide other collateral, such as your car.
What Is a HELOC?
A home equity line of credit is a second mortgage that allows the homeowner to access some of their equity. Rather than waiting to access the equity in the home when you sell, you can take out a line of credit while owning the home to get the cash you need. Many Texas homeowners use a HELOC to pay off credit cards, renovate the home, pay for college or healthcare costs, and much more.
Home equity lines of credit have a variable interest rate that can rise or fall based on market conditions. Many loans have a fixed rate for a few months that eventually will reset to market rates. In recent times, HELOC rates have risen, as has most interest rates in the US. This has happened as the Federal Reserve has hiked rates to combat inflation. In 2024, people with good credit can get a variable rate in the 8% or 9% range.
HELOCs usually have a draw period of 10 years in which you can access your equity. You only pay interest during the draw period, but you will have to pay principle and interest when the draw period ends. Homeowners can pay off the credit line and reuse it if they like. Keep in mind that HELOCs have a variable rate, so if you prefer having a fixed payment, a Texas home equity loan may be a better choice.
You generally need to have at least a 640-credit score to get a HELOC, and 680 or higher is better. People will lower credit scores and a debt-to-income ratio of more than 43% will probably pay a higher rate.
When Is the Best Time for Home Refinancing? Obtaining a lower interest rate may not be feasible at the moment. If your objective is to minimize interest expenses, refinancing might not be advisable at this time. Chances are, you might secure a higher rate, coupled with the necessity to manage closing costs for your new mortgage. Therefore, if you can’t lower your interest rate in a refinance, consider taking out a home equity loan from a Texas mortgage lender that you trust.
Highlights on Taking out Home Equity Loans and HELOCs in Texas
Taking out a HELOC is a popular option in Texas for homeowners to get the cash they need for large expenses. For example, you might want to renovate your home to add to its value, and then sell in a year or two. Getting a HELOC can give you access to $20,000, $30,000, and sometimes much more for those important home improvements.
HELOCs are popular in 2024 because interest rates have risen, and many homeowners have a first mortgage rate that is lower than current rates. So, getting a cash-out refinance doesn’t make sense for many borrowers. Talk to your lender today about taking out a HELOC on your Texas home and find out if it is a fit for your financial needs.
