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

If you’re a homeowner in Texas searching for an affordable loan financing options, 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 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 is a good option if you know exactly how much cash you want or need to borrow. 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.

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

To see how much you may be able to pay each month on a home equity loan in Texas, use the monthly payment calculator from Discover Home Loans.

Calculate your 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 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. The loan borrowing calculator from Discover Home Loans can calculate your CLTV ratio and help you estimate how much money you can borrow given your current credit score and home equity.

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 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 the IRS or your tax advisor to see if your specific loan qualifies for a tax deduction.

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 or down as 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 2.80%-8.50% (as of 10/28/22 ). As you spread the loan out for a longer repayment term, you will see this interest rate range increase to about 3.42%-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. Even if the current year were to have a very low national bank rate, future years can increase, which can push your HELOC variable rate up higher.

Lock in best home equity loan rates in Texas

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