Home Equity Loans in Texas: Frequently Asked Questions
Top of Page
What is a home equity loan?
A home equity loan is a financial product that allows a borrower to use the market value of a home as collateral for a loan. Loans secured by real estate generally are considered safer by lenders, resulting in lower interest rates than for other types of loans. Equity is easily calculated by subtracting the amount owed on the home from the current market value. For example, if a house with a market value of $100,000 has an outstanding mortgage of $30,000, the homeowner has equity of $70,000. If there were no mortgage or other type of lien on the house, the homeowner would have $100,000 in equity.
Top of Page
How much can I borrow?
Through home equity loans, Texans can borrow money using up to 80% of the value of their homes as collateral. Consider the example of a home valued at $100,000 with an outstanding mortgage debt of $30,000 and $70,000 worth of equity. Because homeowners are limited to borrowing no more than 80% of the home's value, the homeowner would simply calculate 80% of $100,000 ($80,000) and then subtract $30,000 to arrive at a maximum loan amount of $50,000. Total mortgage debt, including the amount of any existing mortgages plus the projected home equity lien, cannot exceed 80% of the home's current fair market value. Homeowners with 20% or less equity in their homes are not eligible for home equity loans.
Top of Page
Why can't I borrow against more than 80% of the home's value?
Texans voted to limit the loan amount to 80% to help prevent overextensions of credit and protect our economy during times of economic slowdown.
Top of Page
How are home equity loan interest rates determined?
Home equity loans usually have lower interest rates than other types of consumer loans, except first mortgages. The specific rate is determined by competition among creditors and the borrower's own credit history. It is important to note, also, that a borrower can not be required to pay fees, in addition to interest, in excess of three percent (3%) of the principal amount borrowed. These fees are usually called the closing costs.
Market competition and conditions determine the rates in general; the borrower's own credit history will further effect the rate offered. Home equity loans usually have lower interest rates than do other types of consumer loans, such as loans secured by personal property or loans secured simply by a borrower's signature (unsecured loans). First mortgages (the primary loan on a house) generally have the lowest interest rates. As with any financial arrangement, you should shop around to find the best deal.
Top of Page
What other costs are involved?
Lenders can charge certain fees, usually called closing costs, in addition to interest. On a home equity loan, closing costs cannot exceed three percent (3%) of the principal amount borrowed. Prepaid interest, also known as points, is not subject to the 3% cap.
Top of Page
What if I feel a lender has overcharged me on closing costs?
As a savvy consumer, you should always carefully examine a loan agreement before signing it. Have the lender thoroughly explain the contract's fee structure; you'll discover that any points you've purchased are not considered part of the fee amount subject to the three percent limitation. If a lender has overcharged you, you must give the lender a chance to correct the mistake (called curing the loan) before you can take legal action against them. You need to send a written request to the lender specifying the error so that the lender can issue a corrected loan agreement and refund any amounts due. For more information on this process, contact the Consumer Helpline of the Office of Consumer Credit Commissioner at 800.538.1579.
Top of Page
Are there different kinds of home equity loans?
No, but a home equity loan can hold either first lien or junior lien (often called second) position. If you own your home outright and take out a home equity loan, it will be considered a first mortgage because it is first in line to receive payment if the home is sold or a borrower defaults. If you refinance an existing first mortgage, and pledge some of your equity to receive cash in hand, you will still have just one-but larger-first mortgage. In this loan, generally called a cash out re-fi, the dollar difference between the original mortgage and the refinanced mortgage is the home equity loan amount. A secondary mortgage is a loan secured by a house that already has at least one other mortgage or lien. Taking out a home equity loan in addition to a first mortgage places a second lien against the home. The law prohibits a homeowner from having more than one home equity loan at a time, although a homeowner may have secondary liens from other sources, such as a home improvement loan or a tax lien.
Top of Page
Can I set up a line of credit with my home equity?
As of September 2003, Texans can establish lines of credit using up to 50% of the value of their homes as collateral (as opposed to the 80% allowed on standard loans).
Top of Page
How can I use the money?
However you choose. There are no legal restrictions regarding how you use your loan proceeds.
Top of Page
What if I change my mind?
The law requires a 12-day waiting period from the time an application is taken AND a legally mandated written consumer rights notice is given to the borrower. For example, if a potential borrower submits an application on Monday, but doesn't receive a copy of the consumer rights notice until Wednesday, then the 12-day countdown would begin on Wednesday. The 12-day period is measured in calendar days (rather than business days). Once the waiting period has passed, the loan can be closed. Further, the homeowner or homeowner's spouse may still cancel the loan agreement without penalty within three days after closing.
Top of Page
How many home equity loans can I have?
A borrower may have only one equity loan at a time. Furthermore, it cannot be refinanced more frequently than once a year. Because of this limitation, it is crucial to shop for the best terms among lenders. It is also important, as in any credit transaction, to compare the total costs of a home equity loan to other types of credit available to the consumer. For example, a borrower might not face a prepayment penalty for early payoff of a home equity loan. However, if the loan is paid off early, a home equity loan could end up being more expensive than an unsecured loan with a higher interest rate if you paid closing costs and points.
Top of Page
Why do I have to wait a year to refinance a home equity loan?
Texas voters placed this provision in the Texas Constitution as a consumer protection. Because closing costs and points are collected each time a mortgage loan is closed, generally it's not a good idea to refinance often.
Top of Page
Could a lender foreclose on my home if I'm late paying on a car loan or a credit card?
On a standard car loan, the car itself is the collateral, and Texas law prohibits using a person's homestead as additional collateral on the same loan. However, if a homeowner decides to take out a home equity loan to pay off credit card debts or buy a car, the home is then collateral for the home equity loan and can be foreclosed on if the homeowner does not make payments on time.
Top of Page
What else should I know?
It's always a sound practice to shop around for a loan, but don't fill out any applications until you've picked the company you definitely want to work with. Filling out too many applications may unduly harm your credit report. Before you sign on the dotted line, find out what kind of experience other consumers have had with your potential lenders. Check out lenders with the Better Business Bureau. The Office of Consumer Credit Commissioner regulates certain home equity lenders and offers a Consumer Helpline for credit-related questions at 800.538.1579. The Office of Consumer Credit Commissioner can let you know about consumer complaints it has on file. To get more information about home equity issues or to request lender complaint files, visit the Office of Consumer Credit Commissioner Consumer Assistance page.
This page was adapted from the brochure, "Home Equity Lending: Common Questions and Answers for Texans," prepared by The Office of Consumer Credit; the brochure can be downloaded at www.occc.state.tx.us.
Top of Page
temple belton georgetown killeen texas cameron bell lampasas falls williamson county chamber commerce real estate
