Home equity loan options for Texas homeowners

If you’re a homeowner in Texas searching for an affordable loan financing option, you may have a variety of options when it comes to leveraging the equity in your home. Generally, you can use a home equity loan to tap into your available equity for home renovations, consolidating your high-interest debts, paying for a college education, or just about anything else.

Types of home equity loans

Home equity loans are considered mortgage loans because they use your home as collateral, much like a traditional purchase mortgage does. Both home equity loans and purchase mortgages involve borrowing money from a lender, using your property to secure the loan, and paying back the loan amount plus interest over a specified period.

Three options to consider when you live in Texas and want to borrow from your home equity include traditional home equity loans, home equity lines of credit (HELOC), and cash out refinances. As you research to decide what may work best for you, please note that Discover® offers home equity loans and refinance options, but does not offer HELOCs.

• Traditional home equity loan: A home equity loan is a type of loan where the borrower uses the equity of their home as collateral. It’s a one-time loan that provides a lump sum of money that you typically pay back over a fixed period at a fixed interest rate.
• Home equity line of credit (HELOC): A HELOC is a revolving line of credit that allows you to borrow against your home’s equity. Unlike a home equity loan, a HELOC provides flexibility to borrow money as you need it during a draw period. This is followed by a repayment period when you will make regular payments on principal and interest. HELOCs often come with variable rates which may make it difficult to predict what your monthly payments will be.
• Cash out refinance: With a cash out refinance, a homeowner refinances an existing mortgage for more than they owe and gets the difference in cash. It can help homeowners with higher interest rates on their current mortgage to refinance at a lower rate and access funds from their home equity to pay for home improvements, consolidate debts, or pay for anything else they could with other home equity financing options.

Understanding home equity loans

If you go with a home equity loan, you’ll get one set lump sum of money that you’ll repay over time with fixed monthly payments. Once you receive the lump sum, you won’t be able to borrow any additional funds with the same loan. This makes a home equity loan a closed-end mortgage because it has a fixed term and does not allow continuous access to funds like an open-end mortgage loan such as a HELOC.

This is a good option if you know exactly how much cash you want or need to borrow at the time you take out the loan. Fortunately, home equity loans tend to offer interest rates that are more affordable than interest rates on credit cards, personal loans, or other financing options that are not secured by collateral.

Advantages

• Fixed interest rates and monthly payments: With fixed interest rates, you don’t have to worry about market changes that cause interest rates to go up or down during your repayment period. You’ll have predictable payments that you can budget for accordingly.
• Tax deductible: You may be able to deduct the interest you pay on your home equity loan if you use it to renovate or repair your home. Consult a tax advisor to see if this may apply to your specific situation.

Disadvantages

• Closing costs and fees: Many lenders who offer home equity loans charge closing costs. These may include application, origination, and appraisal fees. However, some lenders offer to cover these fees, so compare lenders before choosing one to decide what works best for you.
• Risk of losing your home: If you default on a home equity loan, you may lose your home. However, by finding the most affordable home equity loan rates in Texas and only borrowing what you can afford to pay back, you can avoid foreclosure.

What are home equity lines of credit (HELOCs)?

If you like the idea of using a credit card to pay for your expenses but want to avoid high interest rates, a HELOC may be right for you.

It works similarly to a credit card—you borrow as you’d like over time, up to a set credit limit. Then, you pay back the amount you borrowed, with interest accruing only for the amount you withdraw from the line of credit.

Some home equity lines of credit may allow you to only pay interest on your borrowed amounts during draw period. Once the repayment period begins you pay back the amount you borrowed plus interest.

Advantages

• Flexibility: If you don’t know how much money you’ll need for a certain expense, you’ll enjoy the flexibility of a HELOC. You don’t have to commit to one lump sum and can borrow money as you need it during the draw period.
• Low closing costs: With HELOCs, closing costs or origination fees may be lower than home equity loans.

Disadvantages

• Variable interest rates: HELOCs usually use variable interest rates, which may fluctuate over the life of the line of credit. If you take out a HELOC, you may find it tough to plan for your monthly payments since they may go up or down as interest rates change.
• Temptation to overspend: Since you can borrow as much money as you’d like from your available equity up to your lender’s limits, you may overspend and put yourself in a difficult financial situation.

Exploring cash out refinances

A cash out refinance is a mortgage refinancing option that allows you to tap into your home equity by refinancing your existing mortgage for a larger loan amount. The difference between the old mortgage and the new loan is provided to you in cash.

It may be a good time to apply for a cash out refinance when interest rates have dropped below the rate you have on your existing mortgage and can result in potentially lower monthly payments and overall interest costs. You may also want to consider this option if your home value has appreciated since you purchased it, and you would like to use that additional equity to cover a large expense.

Advantages

• Lower interest rates: If you apply for a cash out refinance when rates have gone down compared to your existing mortgage, the difference may save you money on monthly payments or over the life of the loan even with a larger loan amount than your current mortgage balance.
• Access to cash: The cash from your equity may be used for just about any purpose including a home remodel, paying off high-interest credit card balances, refinancing a car loan, or all of the above.

Disadvantages

• High closing costs and fees: You may find that closing costs are higher on a cash out refinance compared to other home equity borrowing option because the amount you borrow will likely be higher. Research lenders that offer refinance products with no closing costs to offset these fees.
• Extended loan term: When you refinance, you will likely extend the length of time for paying back your mortgage as well as take out a larger amount.

Comparing home equity loan interest rates for Texas homeowners

Interest rates for both home equity loans, HELOCs, and cash out refinances will depend on your credit rating, available home equity, any other loans that you have against your equity, along with other financial factors.

The length of your loan will also affect your interest rates. Choosing a shorter term may give you higher monthly payments, but you may pay less in interest over the life of the loan. With a longer repayment term, your monthly payments may be lower, but the total amount of interest you pay may be higher than with a shorter term loan.

Keep in mind that HELOC interest rates are variable and depend on the national bank rate, unlike fixed home equity loan and cash out refinance interest rates. Even if the current year were to have a very low national bank rate, future years can increase, which can push your variable rate and your HELOC payment up higher.

Lock in best home equity loan interest rates in Texas

These tips can help you find the best home equity loan rates in Texas:

1. Check your credit score: Typically, the higher your credit score is, the more likely you are to receive lower interest rate offers from lenders. You can also try to improve your credit score by paying off existing debts and staying current with your monthly payments.
2. Check your credit report: Review your credit report before applying for a loan to make sure it doesn’t contain any inaccuracies or errors. If it does, try to resolve those details.
3. Maintain a low combined-loan-to-value (CLTV) ratio: The more equity you have in your home, the more you may be able to borrow. To estimate how much equity you may be able to take out, calculate your CLTV ratio by dividing what you owe on your mortgage and any other loans against your equity by your home’s current value. Lenders may generally be prepared to offer lower interest rates and better loan terms when your CLTV is lower.
4. Keep your debt-to-income (DTI) ratio low: Your debt-to-income (DTI) ratio represents the percentage of your monthly income that goes towards debt payments. For example, if your income is $6,000/month and your only current debt payment is $1,800/month for your mortgage, 30% of your income goes toward paying off existing debt. Typically, lenders will see lower DTI percentages as a positive sign and may offer lower rates as a result.
5. Keep a stable source of income: Your lender will request verification of your employment and source of income to determine your ability to pay back the loan. While situations where you have experienced gaps in either of these may not make you ineligible for borrowing, it may be easier to close on a home equity loan with a record of consistent employment and income.
6. Compare lenders: Research different lenders before deciding so you have an idea of current interest rates and various product offerings. You may find that you want to go with the lender that offers the lowest rates and most flexible terms or that covers all or part of the loan closing costs.