FINANCIAL ADVICE | home improvement

How Texas Home Equity Loans Really Work

Published February 5, 2019

Key Takeaways

  • Here in Texas, special rules apply to home equity loans and HELOCs. 
  • Texas law does not permit more than one home equity loan to be issued for the same house at the same time. 
  • Lenders are also governed by certain legal restrictions.

When is a home more than a home? When it’s a solid financial asset that expands your borrowing power.

Your home may have what’s called equity, or stored value. You can offer your home’s stored value as collateral to banks and credit organizations in return for a home equity loan or a home equity line of credit (HELOC).

Home equity is accrued in two ways: 1) payments you’ve already made on your house, and 2) an increase in your home’s market value since your mortgage began. Here’s how you can calculate the amount you may be eligible to receive in a home equity loan or HELOC:

  1. Find your home’s fair market value.
  2. Find the mortgage balance for your house.
  3. Subtract the mortgage balance from the fair market value. The difference represents your home’s potential equity.

Here’s a quick example of how to calculate basic equity:

Home Market Value = $300,000
Home Mortgage Debt = $200,000
Home Equity = $100,000

Home Equity Loans and HELOCs in Texas

Here in Texas, special rules apply to home equity loans and HELOCs. The good news is that most of them were enacted in order to protect consumers. Some of the rules seem complex, so we’ve summarized the main ones to help keep it simple:

Debt Total Limits. This rule states that your total mortgage debt may not be higher than 80% of your home’s fair market value. As a result, the most cash equity your house can provide is 80% of its fair market value. For example, $80,000 is the maximum equity a $100,000 house can yield.

Conversely, if you owe $80,000 on the same house, you cannot take out a home equity loan for the unencumbered $20,000. Doing so would bring your total mortgage debt above 80% of your house’s current market value, a no-no in Texas.

So let’s factor this Texas law in our basic Home Equity calculation:
Home Market Value = $300,000
80% of Home Market Value = $240,000
Home Mortgage Debt = $200,000
Available Home Equity = $40,000

One loan at a time. Texas law does not permit more than one home equity loan to be issued for the same house at the same time. If you have an equity loan with an outstanding balance, you must pay off the entire amount or refinance it into a new home equity loan. This applies no matter how much equity your house possesses.

One year, one loan. Wait, there’s more. You are allowed to receive a home equity loan or HELOC only one time per calendar year, even if a prior loan taken out that year is fully paid off. If you anticipate needing multiple "draws" from your equity loan, consider a HELOC instead so you can re-borrow funds as you pay down the balance.

Home Equity Rules for lenders

Lenders are also governed by certain legal restrictions. These rules affect loan amounts, grace periods, and other areas that require customer protections. Lenders are required to give homeowners full transparency into all expenses related to their loan – a policy we take absolutely seriously at Credit Union of Texas.

It’s your money. Spend it wisely.

You’re in charge of when or where to use your home’s equity loan or HELOC. By law you may spend it on anything, even items unrelated to the house itself.

Of course, the wise homeowner will give careful consideration to these spending choices. Some loans encompass large sums of money. Impulsive or risky spending can lead to deeper debt and damaged credit.

By contrast, conscientious homeowners favor more practical applications such as:

Debt consolidation. Your mortgage is likely not your only debt. It makes great sense to use a HELOC or home equity loan to consolidate credit card debt, car loans, and other financial balances. There’s a good chance you’ll lower your interest rates and streamline your finances as well. Just be sure not to reaccumulate new debt, since there are legal limits to the amount and number of home equity loans you can do each year.

Home Improvements. Time to replace your roof? Got big landscaping plans? Your HELOC or home equity loan can help cover the costs. What’s more, your home enhancements could increase the value of your property.

The bottom line: You can spend your equity bankroll on any old thing. But you don’t have to.

CUTX stands ready to help

Why wait? Right now may be just the right time for a home equity loan or HELOC. Call a CUTX equity expert today to learn how home equity can boost your borrowing – and your quality of life.

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