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How to use your home's equity for a loan or line of credit in Texas

Couple discussing about home equity loan rates in Texas

If you’re a Texas homeowner in search of an affordable financing option, consider a home equity loan. A home equity loan can give you the chance to borrow against the equity in your home.

There are very few restrictions on how you can use home equity funds. Generally you can use the home equity loan to cover a home addition, car repair, college education, or just about anything else. The two main options to tap into your equity in Texas include home equity loans and home equity lines of credit (HELOC). 

Home equity loans in Texas

If you select a home equity loan, you’ll get one set lump sum of money that you’ll repay over time via fixed monthly payments. Once you receive the lump sum, you won’t be able to borrow any more.

This is a good option if you know exactly how much cash you need or want. Fortunately, home equity loans tend to offer interest rates that are more affordable than those of credit cards, personal loans, and other financing options. To see how much you may be able to pay each month with a home equity loan in Texas, use Discover® Home Loans's monthly payment calculator.

To see how much you may be able to borrow with a home equity loan in Texas, enter your current credit score and home equity amount to Discover Home Loans's loan amount calculator.

Advantages of Home Equity Loans

  • Fixed interest rates and monthly payments: With fixed interest rates, you don’t have to worry about market changes that cause your interest rate 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 the IRS or your tax advisor to see if your specific loan qualifies for a tax deduction.
Woman in her living room making a payment on her low interest rate home equity loan in Texas

Discover does not charge any fees at the home equity loan’s origination

Disadvantages of Home Equity Loans

  • Closing costs and fees: Many lenders who offer home equity loans charge closing costs. Discover does not charge any fees at the closing of your home equity loan.
  • 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. 

HELOCs in Texas

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 borrow, with interest accruing only for the amount you withdraw from the line of credit. 

Some home equity lines of credit allow you to only pay interest on your borrowed amounts during the 5 to 10-year draw period. Once the repayment period begins (which typically lasts 10 to 20 years), you pay back the amount you borrowed plus interest. 

Advantages of HELOCs

  • 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 can be lower than home equity loans. 

Disadvantages of HELOCs

  • Variable interest rates: HELOCs usually use variable interest rates, which will 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 will go up and down as the national economy’s interest rates change. 
  • Temptation to overspend: Since you can borrow as much money as you’d like up to your credit limit, you may overspend and put yourself in a difficult financial situation. 

Comparing home equity loan rates vs. HELOC rates in Texas

Interest rates for both home equity loans and HELOCs will take your credit rating, available home equity, any other loans that you have against your equity, and other financial factors into account. 

The length of your loan will also affect your interest rates: For example, if you are repaying your home equity loan within five years and borrow $25,000 and have an 80% CLTV, you can expect initial interest rates in Texas to range from 2.8% to 8.5% (as of 9/21/21). As you spread the loan out for a longer repayment term, you will see this interest rate range increase to about 3.41%-6.99% for a 15 year home equity loan.

Keep in mind that HELOC interest rates, unlike home equity loan interest rates, are variable and depend on the national bank rate. While 2020 has a very low national bank rate, future years can increase, which can push your HELOC variable rate up higher.

Overall, however, when compared with interest rates for credit cards (where Texas law caps interest rates at 18%) and personal unsecured loans (where high credit scores will see an average rate of 10.3%-12.5% and low credit scores can see interest rates from 28.5%-32%), interest rates for home equity loans and HELOCs in Texas are likely to remain below 10%.

Lock in best home equity loan rates in Texas

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

Check your credit report and improve your score

Check your credit score for free with updates available every 30 days. Dispute any errors or inaccuracies. If you notice your credit score is lower than you’d like it to be, keep in mind that consistently paying bills on time, keeping balances low and only opening new credit cards when necessary can all have a positive effect on your financial health, and in turn, your credit score.

Calculate your combined loan-to-value-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 combined loan-to-value (CLTV) ratio. Here’s how: Divide what you owe on your mortgage and any other loans against your equity by your home’s current value. Discover offers loans for less than 90% CLTV, but the best home equity loan rates in Texas aim for a CLTV that’s 80% or less. Discover’s loan borrowing calculator can calculate your combined loan-to-value ratio and help you estimate how much money you can borrow given your current credit score and home equity.

Shop around

Not all lenders are created equal, so take the time to shop around. You’ll find that some lenders have more fees than others. Fortunately, Discover waives all home equity loan origination fees at closing and offers great home equity loan rates in Texas.

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