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November 08, 2019 | home-buying

Need a Home Equity Loan? Here's Our Texas Primer on Equity Lending


If you’re looking to take out a second mortgage, you’ve likely heard of a home equity loan. But what exactly is this form of financing, and who should take advantage of the resource? In this article, we’ll break down home equity loans and answer some critical questions like:

  • What is a home equity loan?
  • How does a home equity loan work in Texas?
  • What is the difference between a home equity loan and a HELOC?
  • What is the difference between a home equity loan and refinancing?
  • What are some of the advantages and disadvantages of obtaining a home equity loan?

Let’s go!

What Is a Home Equity Loan?

A home equity loan is a type of second mortgage in which you borrow against the equity that you have in your home. Much like your purchase mortgage, a home equity loan’s principal and interest are repaid monthly over a set number of years. There is no set purpose for the funds from a home equity loan. It can be used on the property or not— it is entirely up to the borrower.

How Does a Home Equity Loan Work in Texas?

Texas has some stringent laws when it comes to equity loans. For one, the loans cannot exceed an 80% loan-to-value ratio (LTV). This means that the amount of the loan— and any other mortgage you have against the property– can’t be more than 80% of your home’s value.

For instance: you have a home valued at $200,000, $120,000 of which you still owe. 80% of the home’s market value is $160,000. The difference between the maximum lendable amount and the debt is the home equity that is available to you, which in this case, is $40,000. 

Texas home equity loan restrictions don’t stop there. There is also a law in place that prohibits taking out more than one equity loan at a time. To refinance or obtain another home equity loan, you must fully repay the first loan. And in addition to this, you can only take out one home equity loan or HELOC per the calendar year— even if you’ve fully paid off the old one.

What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

A home equity loan and home equity line of credit (HELOC) have several things in common. For one, they are both borrowed against the equity that you have in the home. Both also use your home as collateral.

But they also have a few key differences.

A home equity loan is a “closed-end” loan. “Closed-end” means that the entire loan amount is paid out upfront. Typically, this type of loan is what people think of when it comes to mortgages and loans. Interest rates on home equity loans generally are fixed, which provides a predictable payment. 

A home equity line of credit, on the other hand, is an “open-end” loan. There is a maximum limit to the loan, but instead of being paid out all at once, these loans are disbursed on a take-it-as-you-need-it system. You aren’t required to take out the full amount that you’ve been approved for and can make payments as you use the money. Interest rates on HELOCs tend to be variable, meaning that the amount of interest you pay may change as time goes on. 

What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

Home equity loans and home equity lines of credit may be closely related, but home equity loans and refinancing are a bit different. 

With refinancing, the borrower ultimately pays off their existing home mortgage with another loan, which usually has better interest rates or a more desirable term. In the end, the homeowner pays off a single mortgage. With a home equity loan, you come away paying off two loans— the purchase mortgage and the home equity loan. One does not replace the other.

What Are Some of the Advantages and Disadvantages of Obtaining a Home Equity Loan?

While a home equity loan comes with a set of advantages, there are also some trade-offs to consider.

Advantages

  • Cash to Do What You Need. Whether you need some extra money to make home repairs or are looking to put the money elsewhere (debt consolidation, student loans, etc.), a home equity loan is one way to take out a large sum of money.
  • Relatively Low-Interest Rate. Not only can you borrow large sums of money, but home equity loan rates in Texas are relatively low compared to other forms of borrowing, such as a credit card.

Disadvantages

  • Additional Costs. Costs associated with taking out another loan can add up. Luckily, home equity loan lenders in Texas are required by law to be transparent about these costs, so you can see exactly how much additional debt you will add.
  • Riskier Way to Get Money. Home equity loans are borrowed against your house, which puts it in danger of foreclosure should you suddenly become unable to make payments. This makes it a riskier borrowing option.

Obtaining a Home Equity Loan

Obtaining a home equity loan is much like getting a purchase mortgage. You’llYou’ll still need to qualify and meet specific requirements such as a minimum credit score and proof that you can repay the loan. Even though qualifications may be a tad looser since it’s secured with your home as collateral, financial institutions still want to ensure that you’ll be able to pay the monthly payments.

Credit unions have some of the most competitive home equity loan rates in Texas, as well as a whole host of other added benefits. Before diving in, be sure to carefully weigh all of the advantages and disadvantages of your unique financial situation. Using the money for something worthwhile that will bring you money when you sell your house or save you thousands make a home equity loan worth it.

It’s ultimately up to you to decide how to spend your money from a home equity loan, and it’s always in your best interest to spend it wisely.

Learn More About Home Equity Loans

Contact Amplify's Kendra Eakins and schedule your consultation today.

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