How does a home equity loan work in Texas?

A home equity loan allows homeowners to borrow money using the equity of their homes as collateral. Also known as a second mortgage, it must be paid monthly in addition to any regular payments on your first mortgage.

Home equity loans can be used to pay for major expenses such as a new or used vehicle, college tuition, medical bills, or any repairs, renovations, and upgrades you wish to make to your home. Typically given as a one-time lump sum, this type of loan is secured against the value of your home equity. Home equity loan interest rates are usually fixed, highly competitive, and can even be close to first mortgage rates. Taking out a home equity loan can be much more cost-effective than using credit cards with high interest rates to make large purchases. 

A Texas cash-out refinance loan, also known as a Section 50(a)(6) loan, is another type of home equity loan that allows homeowners to refinance their current mortgages while using their home equity. Homeowners can refinance a Texas cash-out loan into a conventional loan after one year, however it might not make sense to do so depending on the current interest rates at that time. 

Using your home as collateral comes with some risk — a second lien will be placed on your property, giving lenders the ability to repossess it if you’re unable to make payments. This means that the more you borrow, the higher the risk. Taking out a second mortgage will also lower the amount of equity you have in your home. 

Before you consider taking on a second mortgage, you should ensure that you can afford to pay both the original monthly mortgage payment and a second mortgage payment. A home equity loan may not be the best option if you need only a small amount of cash, because charges such as closing costs, recording fees, loan processing fees, and origination fees can add up. Any home equity loan less than $50,000 may not be the most cost-effective option if you’re looking for a small amount of cash.

How do I build home equity?

Equity is the sum of the difference between your property’s value and the balance of your remaining mortgage. There are several ways to build equity in your home.

  • Make a large down payment: To build equity quickly, homebuyers are advised to put down at least 20 percent of a home’s value up front.
  • Accelerated payments: Divide each monthly payment by half — instead of 12 payments per year, make 24 payments equal to half of your monthly mortgage annually, which can reduce your interest rate over time.
  • Invest in your home: Making improvements and updates to your place of dwelling will increase its value. Even minor fixes such as painting the walls in your dining room can dramatically improve its overall appearance and boost its value.

What are Texas’s home equity loan requirements?

Under Texas state law, the maximum amount of a home equity loan can’t be more than 80 percent of its total appraised value. Second mortgages can also only be taken out on a person’s primary residence, with only one home equity loan on a residence at a time — a new loan cannot be issued out if an outstanding balance remains. Additionally, borrowers can only receive one home equity loan per calendar year, even if a previous loan has been completely paid off. 

Homeowners also have a three-day grace period in which they can cancel receipt of a loan. They’re also protected from a single lender initiating foreclosure proceedings if their account becomes delinquent. 

How do I get a home equity loan in Texas?

To obtain a home equity loan in the state, borrowers should approach potential lenders with their credit score, home appraisal value, contact information for themselves and any other property owners, employment history, current income, current amount owed on their mortgage, length of loan, and the amount of money they need. They should also meet the following requirements:

  • Earn enough income to pay back the loan: This will give you a higher debt-to-income ratio.
  • Increase equity: Have enough equity in your home to satisfy Texas (a)6 laws.
  • Have a credit score in the mid-600s: Different lenders have various requirements, but the higher your credit score, the better the interest rate.
  • A reliable payment: Showing lenders that you’re financially responsible will demonstrate your low risk as a borrower, which may even lead to a better interest rate.
Home equity loans are ideal ways to fund major purchases such as home renovations, a new or used vehicle, or college education. However, there are advantages and disadvantages to using one’s home as collateral, and consumers should understand how home equity loans work before taking on a second mortgage.