An Overview of Home Equity Loans in Texas
Home equity loans are a particular form of home mortgage which enable a homeowner to convert the equity in his home into cash by borrowing money secured by a lien on his homestead. The word "equity" means the difference between the fair market value of your home and the total of all the debts against it. For example, if you have an $80,000.00 home and still owe $30,000.00 on your mortgage, you have $50,000.00 in equity.
Unique Aspects of Texas Home Equity Loans
Because Texas laws have traditionally been designed to protect individuals and their families, home equity loans were not even possible in Texas until late 1997. Change comes slowly, however, so when Texas real estate law was finally amended to permit home equity loans, it included some of the strongest consumer protections in the nation. The law is both lengthy and complex, but some of the most significant provisions are:
- The total of all mortgage debt (not just the home equity loan) cannot exceed 80% of the fair market value of the home. So, if you already have a $30,000.00 mortgage against your $80,000.00 home, the most you can borrow is $34,000.00 ([.80 x 80,000] - 30,000). If the mortgage on that same $80,000.00 home were $65,000.00, a home equity loan would not even be possible because the current mortgage already exceeds 80% of the fair market value.
- Only one home equity loan may be made against a home at a time. While additional financing arrangements might be possible, a homeowner cannot obtain a second home equity loan until the first has been paid in full.
- A borrower is only permitted one home equity loan per year, regardless of how quickly the loan is repaid, and a home equity loan may not be converted to another type of loan.
- Land that is taxed as "agricultural" or "open space" may not be used to secure a home equity loan.
- There are restrictions on who can make a home equity loan. For example, an unlicensed individual cannot make a home equity loan unless the individual is (1) providing seller-financing or (2) related to the borrower within the second degree.
- Lenders are prohibited from charging fees and costs (other than interest) which exceed 3% of the principal amount of the loan. The law provides significant penalties for a lender who violates this rule and refuses to correct the error once it is brought to the lender's attention.
- The lender may not require the borrower to apply the loan proceeds to repay a debt except debt secured by the homestead or debt owed to another lender. The borrower is otherwise free to use the funds for any lawful purpose.
- The loan must be secured only by the home; the lender may not require that additional assets be mortgaged.
- A home equity loan may be closed only at the permanent office of a lender, a title company, or an attorney's office.
- The loan cannot close until 12 days after the borrower has made application for the loan and received a special notice of the borrower's rights.
- Not later than the day prior to closing, the borrower must receive a final itemized disclosure of the actual fees, points, interest, costs, and charges that will be charged. (This requirement may be waived if a bona fide emergency or another good cause exists and the lender obtains the written consent of the owner.)
- After the loan closes, the borrower has three additional days to change his mind and cancel the transaction without any penalty or charge. The loan proceeds cannot be delivered to the borrower until the three day period has passed.
- The lender's rights on default are severely limited in comparison to most other loans. For example, the lender is not permitted to conduct a private foreclosure; all home equity loan foreclosures must be ordered by a court. Moreover, the borrower has no personal liability, meaning that even though the borrower may lose the home in foreclosure the lender will have no right to sue the borrower for money.
Home equity loans can be a useful tool for freeing up funds that would otherwise be locked into a non-income-producing asset. However, they are not without their disadvantages. Before making the decision to apply for a home equity loan, consider the following:
- For most families, their home is their most valuable asset. In Texas, a homestead is protected from the claims of creditors except in a very few instances. So, if you fall behind on credit card payments, or cause a serious automobile accident in which the damages exceed your insurance coverage, you might be sued but you will not lose your home. However, if you fall behind on payments on a home equity loan there is a very real risk that the lender will foreclose. Think carefully about whether you really need the money, and if so whether another form of credit might be more appropriate. Also, be careful not to borrow more than you need.
- While interest rates on home equity loans tend to be lower than some other types of loans, you will still incur expenses in the form of interest and loan fees. You may also be responsible for closing expenses and document preparation fees. Be sure you know how much the loan will cost you. (See the links under the "Other Resources" heading below for help in calculating these costs.)
- Remember that you can only have one home equity loan on your home at a time, you can only get one home equity loan per year, and a home equity loan cannot be converted to another type of loan. It is important to shop carefully for the best deal, because you may later find that it is impossible or prohibitively-costly to make other arrangements if you need more money or if you find a better interest rate.
- Be aware of the time limits associated with making the loan, especially if you must have the funds by a particular date. One problem we frequently see is that borrowers fail to pick up their closing statement the day before the closing. Unfortunately when that happens, the closing must usually be delayed. Delays are not only inconvenient; they can also result in increased costs to the borrower if a fee is charged for re-drafting the loan documents or if the deadline passes on a favorable interest rate lock.
- Read your loan documents carefully before closing to be sure they are correct and that you understand them. Never sign a loan document if you have questions about the meaning of its provisions or if it contains blanks. Texas real estate law can be quite complex, so you may wish to have a Texas real estate attorney review the documents to ensure that they are correctly drafted and to answer any questions you might have. In most cases such a consultation with an experienced Texas real estate lawyer should not require more than one or two hours of billable time (a nominal cost compared to the other expenses you may be paying), and may help you avoid some unpleasant surprises at or after closing.
The credit industry in Texas is regulated by the Office of the Consumer Credit Commissioner (OCCC). The OCCC has published Online Financial Calculators which can be used to estimate your loan eligibility, estimate closing costs, compare loans, and more. The OCCC has also published a brochure on Protecting Your Equity which contains valuable information.
Of course, the Killeen real estate lawyers of Roberts & Roberts have provided legal services in connection with home equity loans since they were first approved. We would be happy to schedule an appointment to meet with you if you have additional questions about home equity loans, or if you need assistance in reviewing your loan documents.