One of the advantages of living in Texas is its strong regulatory system protecting consumers.
One way that manifests itself is through more laws governing home equity lending.
That conservative slant stems from the state’s longstanding protection of homesteading rights and its unique title structure governing all private property transactions. And it affects many rules governing the popular lending tools, which offer fixed interest rates on the lump sums commonly used for home renovations.
The state didn’t even allow home equity loans until 1997, and now it restricts their size so homeowners seeking to leverage their equity don’t inadvertently take on undue risk. A 1997 Texas Constitutional statute known as Section 50 protects consumers from predatory lenders by dictating strict provisions under which lenders must operate, with serious penalties for non-adherence. You can also find these guidelines outlined in the Texas Home Equity Early Disclosure document every borrower receives after applying for a Home Equity Loan.
Home Equity Loan Application & Loan Guidelines
Some Texas laws regarding home equity loan procurement include:
- Restrictions on mortgage debt: Borrowers can't owe more than 80 percent of the market value of their home on their mortgage and home equity loans combined. That means if you already have a $40,000 mortgage against a home worth $80,000, the most you can borrow is $24,000. If your mortgage balance is $65,000, a home equity loan is ruled out because the balance exceeds 80 percent of market value. As equity rises, however, allowable loan amounts rise; the system especially works in your favor when the value of your home has significantly risen since your mortgage was issued.
- One-loan rule: Borrowers may take out only one home equity loan per year (regardless of whether it’s paid off before then) and can’t obtain secondary loans before repaying their primary home equity loan. That’s why it’s important to shop for the best interest rate and borrow enough to meet your needs over the next 12 months.
- Due diligence: Because of requirements surrounding fact-checking, loans cannot legally close until at least 12 days after the borrower applies and receives official notice of borrowers’ rights. That said, the loan-approval process generally takes a minimum of 30 days, something to note if you must have your funds by a particular date. Overall, the process remains less labor-intensive than applying for a mortgage.
- Limited front-end fees: Lenders have capped the fees to 2% of a loans principal. Survey, appraised and title fees are not included.
- Primary residence rule: Your loan only applies to the one- to four-family housing unit in which you live, not your second home or rental property.
- Collateral limits: The lender can’t require that any assets other than the home be used as collateral.
- License required: With very few exceptions, only authorized lenders may make equity loans.
Home Equity Loan Repayment and Closing Guidelines
Some Texas laws regarding home equity loan closing and repayment include:
- Itemization: By no later than the day before closing, the borrower is entitled to an itemized list of all fees, points, principal and interest to be charged (written consent of the borrower may waive this requirement).
- Grace periods: After closing, borrowers have a three-business day grace period for cancellation without penalty or charge. In accordance, loan proceeds can’t be delivered until 3 days later.
- Prepayment OK: Home equity loans can be paid off before they’re due without penalty or extra charge.
- No conversions: Home equity loans cannot be converted to other types of loans.
- Proceeds belong to the borrower: The lender can’t require the borrower to apply loan proceeds toward other debts not tied to the home equity; the borrower may in fact use proceeds for any lawful purpose.
- No term changes: Lenders can’t require a loan to be paid earlier than agreed upon based on the home value decreasing or the borrower defaulting on another loan.
- Two kinds of interest: Lenders may legally charge fixed or variable interest on home equity loans; be clear on your agreement. At Amplify, Home Equity Loans (installment loans) offer fixed interest rates while HELOCs offer variable interest rates.
- Closing location rules: The loan must be closed only at the permanent office of a lender, title company or attorney.
- In-person closing: The borrower himself (not a representative with power of attorney) must attend loan closings.
Interested in a Home Equity Loan?
Amplify Credit Union offers terms of 5, 10, 15 and 20 years, with funds available four days after closing and no prepayment penalties on early or extra principal payments.