Home equity loans are popular ways to leverage a home’s equity, but they have some unique rules in Texas. If you are curious about home equity loans and have questions about how they work, you are not alone!
As with any type of financial product, it's important to get the answers to your questions and understand exactly what you’re getting into before you sign on the dotted line.
Texas Home Equity Loan FAQ
For more information on home equity loans and how they work in Texas, we’ve compiled a list of resources and answers to some of the most common questions we get about home equity loans.
1. What can I use a home equity loan for?
Like a personal loan, you can use funds from a home equity loan to do anything you’d like. Oftentimes, these loans are used for large projects and goals like home renovations, college education, and debt consolidation.
2. How much money can I borrow with a home equity loan?
How much you can borrow depends on the equity you have in your home. The higher your home is valued at, and the more equity you have, the more you can borrow.
It’s important to keep in mind, however, that Texas law prohibits borrowers from borrowing against more than 80% of their home’s value— including their home mortgage. In other words, you must have more than 20% equity in your home to take advantage of it.
To learn more about the 80% equity rule and how to calculate your maximum loan amount, read Texas Home Equity Loan Rules: Everything You Need to Know.
3. Do I have to pay off my mortgage before I take out a home equity loan?
Nope! Home equity loans are commonly referred to as a second mortgage or second lien because they are in the second position to the primary mortgage.
However, taking out a home equity loan while you’re still paying off your mortgage will mean that you have two payments to make each month. Because of this, it’s important to do the math and consider whether you can afford the monthly payments of a home equity loan.
4. Can I take out two home equity loans at the same time?
No. The state of Texas has strict rules governing how homeowners can use their home equity.
For more information about this rule, refer to Texas Home Equity Loan Rules: Everything You Need to Know.
5. Can I lose my home if I default on a home equity loan?
When you take out a home equity loan, you are borrowing against the value of your home. That means that if you default on the loan, the lender has the right to foreclose and sell the home to recoup their loss.
That being said, this is extremely rare. If you ever feel like you won’t be able to make a payment on a home loan, communicate this with your lender. More often than not, lenders can help struggling borrowers find a solution that isn’t foreclosure.
Have other concerns about using home equity? We break down some common misconceptions in Are Home Equity Loans a Good Idea?
6. Do I have to get my house appraised?
Yes, you will likely need to get your house appraised to determine the amount of equity that you have available. The appraisal will typically be conducted by a professional appraiser to determine the current market value of your home based on factors like:
- Condition of the home
- Features of the property
- Recent sale of comparable properties
- Current market trends
Once the appraisal is complete, you'll have a better idea of how much you can borrow against your home equity.
For more information on home appraisals, read Home Appraisal Process: Everything You Need to Know.
7. How does a home equity loan differ from a home equity line of credit?
A home equity line of credit is similar to a home equity loan but has one key difference.
Instead of receiving your funds as a one-time loan lump sum, you will have a line of credit open, which allows you to borrow from your financial institution as needed.
Think of it as a hybrid between a credit card and a traditional loan. When you establish a line of credit, you’ll be approved for a credit limit and a specified borrowing period. When you need money, you go to your lender and withdraw the amount you want. You’ll only pay interest on what you actually borrow.
Learn if a home equity line of credit may be better for you in HELOC vs Home Equity Loan.
8. Is home equity loan interest tax-deductible?
We added this question because it’s a very popular one—but we can only answer it partially. We are not tax professionals, and we can’t give any tax advice.
In some instances, home equity loan interest is tax-deductible. We stress in some instances because this is not necessarily the case for everyone. It’s important to consult a tax professional for this specific question.
9. What is the interest rate for a home equity loan?
Like most loans, home equity loan interest rates will vary depending on personal factors such as credit history and general market conditions. The best way to find out what your interest rate would look like is to shop around and compare lenders.
10. Do home equity loans have closing costs?
Yes, home equity loans have closing costs. However, they are much lower than mortgage closing costs.
Texas laws cap lender fees to 2% of a loan's principal. Amplify Credit Union keeps home equity loan closing costs low with a flat $325 closing fee— no matter the loan amount.
Have More Questions?
We hope this quick FAQ answers all of your questions, but if you have more, don’t hesitate to reach out to the loan pros at Amplify Credit Union. We’re always happy to help you get started with the application process or give you more information about your loan options.