Home Equity Mortgage

What is a Home Equity Loan?

A home equity loan allows a borrower to use the market value of a home as collateral for a loan. Loans secured by real estate generally are considered safer by lenders, resulting in lower interest rates than for other types of loans.  Effective September 2003, Texans may also choose to establish home equity-based lines of credit, referred to as a HELOC. Equity is calculated by subtracting the amount owed on the home from the current market value. For example, if a house with a market value of $100,000 has an outstanding mortgage of $30,000, the homeowner has equity of $70,000. If there were no mortgage or other type of lien on the house, the equity amount would be $100,000.

How much can I borrow?

Through home equity loans, Texans can borrow money using up to 80% of the value of their homes as collateral. Consider the example of a home valued at $100,000 with an outstanding mortgage debt of $30,000 and $70,000 worth of equity. Because homeowners are limited to borrowing no more than 80% of the home’s value, the homeowner would simply calculate 80% of

$100,000 ($80,000) and then subtract $30,000 to arrive at a maximum loan amount of $50,000.

The total mortgage debt, including any existing mortgages plus the projected home equity loan, cannot exceed 80% of the home’s current fair market value. Homeowners with 20% or less equity in their homes are not eligible for home equity loans. In the above example, a borrower may take a second mortgage OR refinance the first mortgage as well.

Why can’t I borrow against more than 80% of the home’s value?

Texans voted to limit the loan amount to 80% to help prevent overextensions of credit and protect our economy during times of economic slowdown.

How are Home Equity Loan interest rates determined?

Market competition and conditions determine the rates in general; the borrower’s own credit history will further affect the rate offered. Home equity loans usually have lower interest rates than do other types of consumer loans, such as loans secured by personal property or loans secured simply by a borrower’s signature (unsecured loans). First mortgages (the primary loan on a house) generally have the lowest interest rates.

What other costs are involved?

Lenders can charge certain fees, usually called closing costs, in addition to interest. On a home equity loan, closing costs cannot exceed 3% of the principal amount borrowed. Prepaid interest, also known as points, is not subject to the 3% cap.

Are there different kinds of Home Equity Loans?

No, but a home equity loan can hold either first lien or junior lien (often called second) position.

If you own your home outright and take out a home equity loan, it will be considered a first mortgage because it is first in line to receive payment if the home is sold or a borrower defaults.

If you refinance an existing first mortgage, and pledge some of your equity to receive cash in hand, you will still have just one—but larger—first mortgage. In this loan, generally called a cash out re-fi, the dollar difference between the original mortgage and the refinanced mortgage

is the home equity loan amount. A secondary mortgage is a loan secured by a house that already has at least one other mortgage or lien. Taking out a home equity loan in addition to a first mortgage places a second lien against the home.

Could a lender foreclose on my home if I’m late paying on a car loan or a credit card?

No. Securing an open line of credit, such as a credit card account, with a homestead is prohibited in Texas. On a standard car loan, the car itself is the collateral, and Texas law prohibits using a person’s homestead as additional collateral on the same loan. However, if a homeowner decides to take out a home equity loan to pay off credit card debts or buy a car, the home is then collateral for the home equity loan and can be foreclosed on if the homeowner does not make payments on time.

What if I change my mind?

The law requires a 12-day waiting period from the time an application is taken AND a legally

mandated written consumer rights notice is given to the borrower.  Once the waiting period has passed, the loan can then close.  Additionally, the homeowner OR the homeowner’s spouse can cancel the loan within three days after the closing.

How often can I get a Home Equity Loan?

You can only get a home equity loan once every 12 months.  Texas voters placed this provision in the Texas Constitution as a consumer protection.  Because closing costs are charged each time a mortgage loan is closed, generally it’s not a good idea to refinance often.

NOTE – This information is from the Texas Office of Consumer Credit and may change at any time.  Please contact our office to verify if you qualify for a home equity mortgage.