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One of the advantages of living in Texas is its strong regulatory system protecting consumers. This manifests itself in many ways, including the unique laws governing home equity lending.
These laws in particular stem from the state’s long-standing protection of homesteading rights and its unique title structure governing all private property transactions. You might not know much about these statutes, but you may be familiar with the financial products that they affect— home equity loans and cash-out refinances.
Unlike other states, Texas didn’t allow home equity loans until 1997. Even after allowing these kinds of loans, Texas legislation restricts loan size so homeowners seeking to leverage their equity don’t inadvertently take on undue risk. All of these restrictions and provisions are outlined in the 1997 Texas Constitutional statute known as Section 50. You don’t have to read pages of complicated legislation to understand the basics—we have a simplified version right here.
Knowing Texas home equity laws can help you plan how and when you use your home’s equity. These laws apply to home equity loans, home equity lines of credit, and cash-out refinances.
Remember how we said these laws prevent consumers from taking on undue risk? One big part of this is limiting the amount of home equity that a person can borrow against. Texas law sets this at 80%. So, for example, if you have a home that is worth $200,000, and you don’t have a mortgage (you have paid off 100% of your home), the largest home equity loan that you could obtain would be 80% of the value, or $160,000.
Let’s say you still owed $60,000 on your mortgage—the maximum that you could take out would be a $100,000 loan.
Here’s our math:
$200,000 [Home Value] x 80% (maximum loan allowed) – $60,000 [Amount still owed] = Home Equity Loan Amount
What you owe on your mortgage and what you owe on a home equity loan must be less than 80% of the home’s value. This means that in order to take out a home equity loan, HELOC, or a cash-out refinance, you need to have 20% equity in your house, at a minimum. And, the more equity you have, the more you can borrow.
