Texas has home equity financing laws that don’t apply to other states. The government put these in place to reduce a homeowner’s risk of foreclosure. For instance, you can only borrow up to 80% of your home’s appraised value if you take out a home equity loan in Texas — even if a lender advertises a higher cap. You can also only have one home equity loan at a time.
If you’re considering a home equity loan in Texas, here’s what you need to know.
How home equity loans work in Texas
A home equity loan allows you to borrow against the “equity” you have built up in your home and use it for home improvements, medical bills, college tuition and more
Equity is the difference between your home’s appraised value and your outstanding balance on the mortgage.
For instance, if your home is appraised at $150,000, but you only owe $100,000 on your mortgage, you have $50,000 in home equity. Texas law allows you to borrow up to 80% of your home’s equity. So, in this case, your loan maximum would be $40,000.
With a home equity loan, you receive the entire loan amount upfront and make fixed monthly payments for the loan’s life. Your interest rate is usually lower than the interest rate you’d pay on a credit card or personal loan.
How to get a home equity loan
These are the typical requirements to get a home equity loan in Texas.
- At least 15% to 20% equity built up in your home
- A credit score of 620 or higher
- A loan to value (LTV) that doesn’t exceed 80%
- Have had your existing mortgage for at least 12 months
- Have no other existing home equity loans
- Are taking out a home equity loan for your primary residence. (Investment properties and vacation homes don’t qualify.)
Once you pay off a Texas home equity loan, you must wait at least one full year before you can open up another home equity loan on the same property.
How HELOCs work in Texas
HELOCs in Texas work similarly to home equity loans. Texas law requires that all HELOCs have a maximum loan-to-value ratio of 80%. So, you can only borrow up to 80% of your home’s appraised value.
The main difference is that with a HELOC, you can draw on the line of credit as needed, up to the maximum loan amount. You only make payments on the amount you borrow, and you can re-borrow the money as needed — similar to how you would use a credit card. Texas law also states that your home equity line of credit must have a minimum draw of $4,000.
Texas cash-out refinance loans
A cash-out refinance loan replaces your existing mortgage with a new, larger loan, allowing you to take out cash in the form of equity. In Texas, a cash-out refinance is also called a Section 50(a)(6) loan.
For example, if your home is worth $100,000 and you owe $70,000 on your mortgage, you have $30,000 in home equity. If you took out a cash-out refinance loan for $80,000, you would receive $10,000 in cash at closing.
Texas has a few state-specific rules you must meet to qualify for a cash-out refinance:
- FHA, VA and USDA loans don’t qualify for a Texas cash-out refinance.
- You can’t do a cash-out refinance more than once per year.
- The property you’re refinancing must be your primary residence. Investment properties, vacation homes and multi-unit loans don’t count.
Calculate and compare home equity loan or HELOC interest rates
Use our tool to get personalized estimated rates from top lenders based on your location and financial details. Select whether you’re looking for a Home Equity Loan or a HELOC.
Select home equity loan or HELOC, enter your ZIP code, credit score and information about your current home to see your personalized rates.
How to get the best rate in Texas
Using these tips can help improve your chances of qualifying for a lower rate on a home equity loan in Texas.
- Improve your credit score. A good credit score demonstrates to lenders that you’re a low-risk borrower, which can lead to a lower interest rate on your loan. Paying off debt and paying your bills on time are two ways to improve your score.
- Shop around for the best deal. Different lenders offer different rates, so it’s important to compare offers before you decide on a loan. Compare interest rates, closing costs and other fees.
- Go local. While shopping, compare rates from local banks and credit unions in Texas. These institutions are familiar with Texas home equity laws and can help you evaluate your options.
- Keep your loan-to-value ratio low. A lower loan-to-value ratio indicates to lenders that you’re not borrowing a large amount of money relative to your home’s value, which can lead to a lower interest rate.
- Have a strong income and employment history. Lenders like to see borrowers who have a steady income and employment history, as this indicates that you’re more likely to make your loan payments on time.
- Choose a shorter loan term. A shorter loan term means you’ll have a lower interest rate because you’ll pay off the loan faster.
- Get pre-approved for a loan. Getting pre-approved gives you a better chance of being approved for a home equity loan or HELOC at a lower interest rate.
- Choose a fixed-rate loan. With a fixed-rate loan, your interest rate will stay the same throughout the loan’s life, so you’ll know exactly how much you’ll need to pay each month.
Alternative financing for Texans
If you don’t think you’ll qualify for a home equity loan in Texas — or you simply don’t want to risk foreclosure — you may want to consider these alternatives.
- Personal loans. Personal loans can be used for a variety of purposes, including consolidating debt, financing large purchases or making home improvements. Your property isn’t used as collateral, but interest rates may be higher.
- Private student loans. If you’re thinking about taking out a home equity loan to send your kid to college, a private student loan can be used to cover the cost of tuition and other education-related expenses, including those not covered by federal student loans.
Home equity loans in Texas have more regulations than in other states. If you’re thinking about turning your home’s equity into a source of cash, explore our home equity guide first and keep these rules in mind as you shop around for rates.