Home Equity Loans are also known as “cash-out refinance” loans, and in Texas they are also referred to as “Texas cash-outs” or a “Texas A(6)”, referring to the article of the law that governs mortgages in Texas. In Texas, there are many onerous rules that govern a home equity loan on a primary residence and make it unique to other states. But the two main rules that you really have to watch out for are:
you are limited to 80% of the value of the home when you are pulling cash out of a primary residence. If either your first or second lien is designated an “A(6)” loan, the sum total of all loans on that property cannot be above 80% of the value of the home at the time the home equity loan was taken out.
your closing costs are limited to 3% of the loan amount when you are pulling cash out of a primary residence. Closing costs refer to any and all non-recurring charges that you would not incur if you did not refinance. The only exception to this are any discount points you pay to reduce your interest rate – those are not subject to the 3% rule.
A home equity loan is a commonly used option for those who have built up their home’s equity. It allows the owner to borrow against the equity they’ve built. It goes by a few other common names, such as second mortgage, cash-out financing, or even “debt consolidation”. The money received from a home equity loan can be used for anything, though it often goes to a home-based expense (most Austin home equity loans go towards remodeling efforts, for example). The longer you’ve owned and paid on your home, the better options you will get for a home equity loan (Austin).
Many homeowners turn to equity loans because of its lack of restrictions on what the money can be spent on, but there are other advantages as well. For starters, home equity loan rates are lower than most other types of loans available, making them much easier to pay back over time. This is especially useful when requesting a large sum or when covering unexpected emergencies.
Another advantage is that the bar for qualifying for equity loans is quite low. That isn’t to say they’re open to everyone, but because the loan is based on the equity of your home, your house is actually used as collateral against the loan, thus lenders see less risk in lending money in this way. That said, the approval process is much the same as other types of loans, and when determining your ability to repay, a lender will look at your income, work history, current outstanding debts, and other factors (you will likely be familiar with them because you went through them previously for your first loan).
Your equity loan can be given to you in a lump payment or as a line of credit, and how you choose to receive can effect the home equity loan rates available to you.
However, it should be noted that equity loans in Texas are subject to numerous laws and requirements not commonly found in other states, so much so that the loans are commonly nicknamed “Texas cash-outs” and “Texas (A)6” (the state law that regulates equity loans). As you might imagine, this is a very complicated set of issues that are best discussed directly with lenders, but there are two important differences that we believe should be brought to every borrower’s attention:
– You are limited to using 80% of the value of the home you’re pulling the loan from. This is significant because it’s a common misconception that the entire home’s value can be used. There are many reasons for this limitation, but for the most part it’s done as a form of protection for both the lender and the buyer should issues arise later on with repayment.
– Closing costs are capped at 3% of the value of the home your drawing the loan from. There is an exception to this, however: discount points paid to reduce interest rates are not restricted as part of the 3% limit.
We invite those seeking home equity loans in Austin and the surrounding area to contact us at Highlander Mortgage right away. We’ll be happy to address your concerns about home equity and other types of loans.