10 Things To Know Before Getting a Home Equity Loan in Texas
Home equity lending was not legal in Texas until 1998. To protect vulnerable borrowers from predatory lenders, the state instituted a number of consumer protection laws as soon as the market opened. Here are ten specific things you need to know about these laws before getting a home equity loan in Texas.
Loan to Value Ratios are Limited
In accordance with state law, Texans can borrow up to 80 percent of a home’s fair market value. To calculate the maximum amount you could borrow, simply multiply your home’s value by 0.80 and subtract any money you owe on the home. For example, if your home is valued at $200,000, 80 percent of the value would be $160,000. If you currently owe $130,000, you can borrow up to $30,000 from your home’s equity.
Closing Costs are Capped
Home equity loan lenders in Texas are legally allowed to charge fees for originating a loan. These fees are in addition to interest and are generally referred to as closing costs. In Texas, closing costs can not exceed 3 percent of the amount borrowed. Unfortunately, this cap does not apply to prepaid interest (points) and broker fees. To see exactly what you will be required to pay and why, refer to the lender’s Good Faith Estimate and Truth in Lending disclosure.
Prepayment Penalties are Prohibited
Prepayment penalties are often tacked onto loans as a way for lenders to make extra money. If the borrower ever decides to refinance or pay off a loan that has a prepayment penalty, a fee would apply. In Texas, prepayment penalties on home equity loans are prohibited. This means borrowers can get a home equity loan and pay it off anytime they wish without being liable for exorbitant fees.
One Loan at a Time
In Texas, borrowers are only allowed to have one home equity loan at a time. Borrowers are still allowed to take out other loans, like home improvement loans and personal loans, but taking out two home equity loans is out of the question. This law is in place to prevent overextensions of credit.
Refinance Provisions Exist
To prevent equity stripping scams and multiple refinances, Texas voters included a provision in the Constitution requiring borrowers to wait at least one year before refinancing a home equity loan. With this provision in place, it is important for borrowers to be satisfied with the loan terms and confident in their ability to pay before taking out a loan.
There is a 12 Day Waiting Period
Before getting a home equity loan in Texas, there is a 12 day waiting period that must be observed. The waiting period is measured by calendar days versus business days, and begins after a borrower fills out a home equity loan application and receives a written consumer rights notice. The loan can be cancelled without penalty at any time during this 12 day period.
No Restrictions on Loan Proceeds
In Texas, there are no state laws to dictate what you can and can’t do with the money you get from a home equity loan. In other words, you can spend your loan proceeds however you see fit. Of course, this doesn’t mean that you should spend the money irresponsibly. Anything you borrow will have to be paid back with interest.
Payments Must Be Made On Time
If you do not repay your home equity loan in accordance with the terms established by the lender, Texas law allows the lender to foreclose on your home under court order. The reason is because your home is used as collateral for the loan. (This is true regardless of how you spent your loan proceeds).
Lines of Credit are Legal Now
Home equity loans aren’t the only way a Texas homeowner can borrow against equity. As of 2003, borrowers can also establish a line of credit. Lines of credit work a lot like a standard home equity loan, but can be more flexible for certain borrowers. Under Texas state law, homeowners can borrow up to 50 percent of their home’s fair market value.
Help is Only a Phone Call Away
Certain home equity lenders are regulated by the Office of Consumer Credit Commissioner. This agency has established a consumer helpline for homeowners who have questions about home equity loans. If you want to learn more about the way home equity loans work, the consumer protections that are in place, or the consumer complaints on file, call the helpline at 1.800.538.1579.