Home equity loan options for Texas homeowners

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. And 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 a draw period. Once the repayment period begins you pay back the amount you borrowed plus interest.

LEARN MORE: Home equity loan vs Home equity line of credit (HELOC)

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.
• Interest-only payments: With HELOCs, your lender may potentially allow you to make monthly payments only on interest charges during the draw period. After the draw period finishes, your monthly payments will go toward both interest charges and the outstanding principal balance. Payment requirements may vary between lenders, so make sure you know what to expect before you apply.

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.

What is cash out refinancing?

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. Most of 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.

LEARN MORE: What is a cash out refinance?

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 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 options 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.

Getting a home equity loan in Texas

The state of Texas has unique regulations and restrictions on home equity lending and on what homeowners may be eligible to borrow. It is important to be aware of these conditions if you live in Texas and are interested in taking out a home equity loan.

1. Equity limits: Texas law restricts borrowers from utilizing more than 80% of their home’s equity when obtaining a home equity loan. While different lenders you compare may offer borrowing up to higher combined loan-to-value (CLTV) ratios, Texas state law does not allow for mortgaging more than 80% of your home’s current market value. That percentage cap includes the combination of your existing mortgage(s) plus the amount of any new loan.¹
2. Closing location: Rule §153.15 of the Texas Administrative Code states that home equity loan closings must be done in person at the offices of a lender, attorney, or title company. That means no virtual closing appointments that may be available to homeowners in other states, if your lender offers that option.¹
3. Regulatory oversight: The Office of Consumer Credit Commissioner (OCCC) in Texas oversees and regulates the credit industry, including home equity lending laws.²

For more information about home equity lending requirements in the state of Texas, contact your lender with questions or seek out relevant OCCC resources.

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 typically variable and depend on the national bank rate, unlike a 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.

DIG DEEPER: How to find the best home equity loan options

Lock in the 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. 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.
4. 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.
5. Maintain a low 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 home by your home’s current value. Lenders may be prepared to offer lower interest rates when your CLTV is lower.
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.

As you navigate the dusty trails of home equity lending in Texas, remember that knowledge is your best companion on this journey. Understanding the ins and outs of equity limitations, credit score requirements, and paperwork roundups can empower you to make the best decisions for achieving a bright financial future.