Restructuring Home Equity Loans: Texas Law Options

Texas has a robust regulatory framework designed to protect consumers and homeowners. The state's home equity loan regulations are more stringent than those of other states, aiming to prevent homeowners from borrowing more than their house is worth. Texas law restricts loan size, limiting the amount of home equity that can be borrowed against to 80% of the home's value. The state also caps lender fees at 2% of the loan's principal and prohibits lenders from demanding extra collateral beyond the home itself. With these rules in place, Texas homeowners can avoid over-leveraging their properties and falling into financial distress. While the regulations provide a financial safety net, they also present unique challenges for lenders when it comes to modifying home equity loans. Lenders and borrowers can agree to modify loan provisions as long as the changes comply with Texas law. This includes maintaining substantially equal successive periodic installments and not restructuring the loan to include a balloon payment.

Interest rates and fees

Texas has a robust regulatory framework designed to safeguard consumers and homeowners. The state's approach to borrowing and property rights is historically conservative, which is reflected in its home equity loan regulations.

Texas law sets a cap on the amount of home equity that can be borrowed against, limiting it to 80% of the home's value. This means that if a homeowner owes money on their mortgage, the maximum they can take out as a home equity loan will be less than 80% of the home's value. For example, if a homeowner has a property worth $200,000 and owes $60,000 on their mortgage, the maximum home equity loan amount they could obtain would be $100,000.

Lender fees for home equity loans in Texas are capped at 2% of the loan's principal. This does not include fees for appraisals, surveying, or title services. Lenders are required to provide an itemized list of all fees, points, principal, and interest to be charged by the day before closing. Borrowers may waive this requirement with written consent.

Texas law prohibits lenders from demanding extra collateral or assets beyond the home itself. Lenders cannot require borrowers to put up other valuables, such as automobiles, boats, or prized collections, as collateral to secure a home equity loan.

The interest rate on a modified home equity loan in Texas can be changed as long as it complies with the state's usury limit. There is no constraint on the interest rate other than this limit, and it can be any fixed or variable rate authorized under statute. However, the loan cannot be restructured to include a balloon payment. This is because Texas law requires that the loan must be repaid in "substantially equal successive periodic installments."

The Texas Constitution Article 16 outlines specific provisions regarding interest rates and fees for home equity loans. These include a prohibition on contracting, charging, or receiving any rate of interest authorized by Texas law, and a requirement that a percentage of reverse mortgage proceeds be advanced before the assignment of the reverse mortgage.

Restrictions on loan size

Texas law places restrictions on the size of home equity loans. The state's long-standing protection of homesteading rights and its unique title structure governing all private property transactions are the basis for these laws. Texas legislation restricts loan size to prevent homeowners from inadvertently taking on undue risk by over-leveraging their properties.

The restrictions and provisions are outlined in the 1997 Texas Constitutional statute, known as Section 50. Texas law sets the maximum home equity loan amount at 80% of the home's value. For example, if a homeowner has a house worth $200,000 and no mortgage, the largest home equity loan they could obtain would be $160,000. If they still owed $60,000 on their mortgage, the maximum loan amount would be $100,000. To take out a home equity loan, HELOC, or cash-out refinance, a minimum of 20% equity in the house is required.

Lenders in Texas are also capped at charging a maximum of 2% in fees based on the loan amount. This ceiling pertains to the loan's principal and does not include fees for appraisals, surveying, or title services. Lenders are required to provide an itemized list of all fees, points, principal, and interest to be charged by the day before closing. Borrowers may waive this requirement with written consent.

Additionally, Texas law prohibits lenders from demanding extra collateral or assets beyond the home itself. Lenders cannot require borrowers to put up other valuables, such as automobiles, boats, or prized collections, as collateral to secure their home equity loan. With very few exceptions, only authorized lenders may make equity loans. Lenders must possess a license to offer home equity financing.

Texas law also imposes a mandatory waiting period for home equity loans. Financing cannot be finalized any sooner than 12 days from the application date. Closing on a home equity loan must be conducted at the permanent office of a lender, lawyer, or title company, and the borrower must be present. Borrowers have a grace period of 3 business days after closing, during which they can cancel the loan without fees or penalties.

Consumer protections

Texas has a robust regulatory framework designed to safeguard consumers and homeowners. The state's historically conservative approach to borrowing and property rights aims to minimize foreclosures and shield homeowners. Texas law caps lender fees at 2% of a loan's principal, excluding survey, appraisal, and title fees. Lenders are also prohibited from demanding extra collateral beyond the home itself, such as automobiles, prized collections, or boats.

The state's home equity lending laws provide essential consumer protections. For instance, a lender can only foreclose on a home equity loan based on a court order, and the loan must be without recourse for personal liability against the borrower and their spouse. This means that if a borrower defaults on a home equity loan, the lender cannot pursue the borrower's other assets or income to recover the debt.

Additionally, Texas law requires a mandatory waiting period of at least 12 days between the loan application and the finalization of the loan to allow borrowers to understand their rights and conduct due diligence. Closing on a home equity loan must take place at the permanent office of a lender, lawyer, or title company, and the borrower must be present. Borrowers have a grace period of three business days after closing to cancel the loan without incurring any fees or penalties. They can also use their liquidated home equity funds for any lawful purpose.

Texas law also restricts the amount of home equity that can be borrowed against, typically up to 80% of the home's value. This prevents consumers from taking on excessive risk and ensures that the loan amount does not exceed the value of the property. These consumer protections are unique to home equity loans, and refinancing as a non-home equity loan may result in the loss of certain protections.

Closing and repayment

Firstly, there is a mandatory waiting period of at least 12 days between the loan application and the finalization of the loan. This waiting period is designed to allow borrowers time to understand their rights and conduct due diligence. The closing of the loan must take place at the permanent office of a lender, lawyer, or title company, and the borrower must be physically present.

Secondly, Texas law requires lenders to provide an itemized list of all fees, points, principal, and interest charges by the day before closing. Borrowers have the right to waive this requirement with written consent. Lenders are also capped at charging a maximum of 2% in fees based on the loan's principal, excluding survey, appraisal, and title service fees.

Thirdly, borrowers are given a grace period of 3 business days after closing, during which they can cancel the loan without incurring any fees or penalties. It is important to note that home equity loans in Texas cannot be converted into another type of loan. However, they can be refinanced as either a home equity loan or a non-home equity loan, with different consumer protections applying to each type.

Additionally, borrowers are allowed to use their liquidated home equity funds for any lawful purpose. Lenders cannot force borrowers to pay off the loan earlier than agreed upon, even in cases of default on a different loan or a decrease in home value. The loan must be repaid in substantially equal successive periodic installments, and it cannot be restructured to include a balloon payment.

Lastly, Texas law restricts the amount of home equity that can be borrowed against, typically capping it at 80% of the home's value. This means that borrowers must have a minimum of 20% equity in their homes to take out a home equity loan, ensuring they do not take on more debt than their house is worth.

In conclusion, the closing and repayment process for a home equity loan in Texas involves strict adherence to the state's regulatory framework, which is designed to protect consumers and homeowners from financial distress and over-leveraging their properties. Borrowers should ensure they understand their rights and obligations before finalizing any loan agreement.

Loan refinancing options

In Texas, the lender and borrower can agree to modify any loan provision as long as the changes comply with the Texas home equity statute and regulations. This means that a home equity loan can be restructured under Texas law, as long as the new terms would have been permitted by applicable law at the date of the closing of the extension of credit. For example, the loan cannot be restructured to have a balloon payment.

There are several loan refinancing options available. The best option depends on your goals. Here are some common options:

• No cash-out refinance: This is the most common option, where you refinance the remaining unpaid balance on your mortgage. This option may be suitable if you want to lower your mortgage rate, switch from an adjustable-rate mortgage to a fixed-rate mortgage, or build equity faster.
• Cash-out refinance: With this option, you refinance your mortgage for more than you currently owe and receive a portion of your equity in cash. Cash-out refinances generally have a slightly higher mortgage rate because you are borrowing more money.
• Rate-and-term refinance: This is a common type of refinancing that replaces your current mortgage with a new mortgage with a different interest rate, loan term, or both.
• No-closing cost refinance: This option does not require you to pay closing costs upfront; instead, you bundle these fees into the new loan.
• Short refinance: This option is for borrowers with an underwater mortgage, where the borrower owes more on their mortgage than the current value of their home. The lender agrees to refinance the loan to match the home's current market value.
• Reverse mortgage: This option allows homeowners aged 62 or older (or 55 and older, depending on the lender) to turn their equity into tax-free income.

Frequently asked questions