Texas protects homesteads more strongly than most states. For much of its history, the state did not allow homeowners to borrow against the equity in their homes at all. Today home equity loans are permitted, but they must follow detailed rules written into the Texas Constitution, in Article XVI, Section 50(a)(6). These rules apply to cash-out refinances of a homestead as well as stand-alone home equity loans and home equity lines of credit.
Why Texas rules are different
The constitution lists the only kinds of debt that can be secured by a homestead, such as purchase money, property taxes, certain improvements and qualifying home equity loans. A loan that takes cash out of a homestead must meet every condition in Section 50(a)(6); otherwise the lien may not be valid. Because the stakes are high for lenders, Texas home equity loans tend to follow a strict, standardized process.
Key requirements in plain terms
- Borrowing limit: the total of all loans secured by the homestead, including the new one, cannot exceed a set share of the home's fair market value. The limit is written in the constitution, so check the current figure with your lender.
- Written notice and waiting period: you must receive a specific written notice explaining your rights, and the loan cannot close until a required number of days has passed after you receive it and after you receive certain final disclosures.
- Right to cancel: after closing, you have a short period during which you can cancel the loan without penalty.
- Frequency limits: you generally cannot have more than one home equity loan on the homestead at a time, and there are limits on how often a new one can be made.
- Voluntary and with spouse's consent: the loan must be voluntary, and a spouse who has a homestead interest must consent.
- Where closing occurs: closing must take place at an office of the lender, an attorney or a title company, or another location the rules allow.
- Non-recourse protection: in most cases the lender can look only to the home, not your other assets or wages, if you default, and foreclosure requires a court order.
- Fee limits and acknowledgment of value: certain fees are capped, and you and the lender sign a written acknowledgment of the home's fair market value.
Cash-out refinance versus rate-and-term refinance
A refinance that only pays off existing homestead debt and closing costs, without giving you extra cash, is generally not a home equity loan under these rules. If you receive cash beyond limited amounts, or pay off other debts such as credit cards, the loan becomes a Section 50(a)(6) loan and all the protections and limits apply. Later, it may be possible to refinance a home equity loan into a regular loan if conditions set by the constitution are met. Ask your lender how a proposed refinance will be classified.
Home equity lines of credit
Texas also allows home equity lines of credit on homesteads, subject to their own conditions, such as limits on the minimum draw and on how the line can be accessed. Compare the terms carefully with a closed-end home equity loan.
Questions to ask before you borrow
- Is this loan a Section 50(a)(6) home equity loan, a line of credit or a rate-and-term refinance?
- How does the lender value the home, and what is the maximum I could borrow?
- Which fees count toward the constitutional cap, and what will I pay in total?
- When will I receive the required notice and final disclosures, and when is the earliest closing date?
- What happens if I want to refinance again in a few years?
Key takeaways
- Texas home equity loans and cash-out refinances must meet the conditions of Article XVI, Section 50(a)(6).
- Protections include borrowing limits, required notices, waiting and cancellation periods, and limited lender recourse.
- The Texas Office of Consumer Credit Commissioner and the Texas Department of Savings and Mortgage Lending publish consumer information on these loans.
This article is general information, not legal, insurance, tax or lending advice. Rules and lender requirements change, so confirm details with your lender, the relevant Texas agency or a licensed professional.