Texas HELOC: A Guide to Home Equity Lines of Credit in the Lone Star State

For Texas homeowners, the equity built up in their property is one of their most valuable assets. A Home Equity Line of Credit, or HELOC, offers a flexible way to unlock that value, providing a reusable source of funds for everything from home renovations to unexpected medical bills.

However, borrowing against your home in the Lone Star State is different. The Texas Constitution provides unique and robust protections for homesteads, making a Texas HELOC a distinct financial product with its own set of rules. This guide will explain how a HELOC works, detail the specific Texas regulations that safeguard homeowners, and help you decide if this flexible financial tool is right for you.

What is a Home Equity Line of Credit (HELOC)?

Think of a HELOC as a credit card that is secured by your home. Instead of receiving a single lump-sum payment (like with a home equity loan), you are approved for a specific credit limit. You can then borrow—or “draw”—money from this line of credit as needed, up to your approved limit.

A HELOC is typically structured in two distinct phases:

• The Draw Period: This is the timeframe, often lasting 10 years, during which you can actively borrow from your line of credit. You can withdraw funds multiple times, and as you repay the principal, your available credit is replenished. During this period, you are typically only required to make payments on the interest accrued on your outstanding balance, which can result in lower initial monthly payments.
• The Repayment Period: Once the draw period ends, you can no longer borrow from the account. The loan converts to a repayment phase, where you pay back the remaining principal balance plus interest over a set term, which could be 20 years. Your monthly payments will be higher during this period as they now include both principal and interest.

The primary appeal of a HELOC is its flexibility. It’s an ideal tool when you have ongoing expenses or don’t know the exact final cost of a project.

The Unique Rules for a Home Equity Line of Credit in Texas

All home equity lending in Texas is governed by Section 50(a)(6) of the Texas Constitution. These laws are designed to protect homeowners from predatory lending and excessive debt.

The 80% Combined Loan-to-Value (CLTV) Cap

Like a standard home equity loan, a Texas HELOC is subject to the 80% CLTV rule. This means your total home-secured debt—your primary mortgage balance plus the full amount of your HELOC credit limit—cannot exceed 80% of your home’s appraised fair market value.

• Example:
  • Your home’s appraised value: $500,000
  • Maximum allowable debt (80% of value): $400,000
  • Your current mortgage balance: $275,000
  • Maximum HELOC credit limit: $125,000 ($400,000 – $275,000)

The 50% Outstanding Balance Rule

This is a critical, ongoing rule specific to Texas HELOCs. At the time of any new advance or draw from your line of credit, your total outstanding principal balance on the HELOC cannot exceed 50% of your home’s current fair market value. This provides an extra layer of protection against over-borrowing, especially if property values fluctuate.

Minimum Advance Amount

A Texas HELOC is intended for significant expenses, not small, everyday purchases. State law mandates that each individual draw or advance from your HELOC must be at least $4,000.

Other Constitutional Safeguards

Several other protections that apply to traditional home equity loans also apply to HELOCs:

• Non-Recourse Loan: If you default, the lender can take the home, but they cannot sue you for additional money if the sale doesn’t cover the debt.
• No Prepayment Penalties: You are free to pay off your HELOC balance early without incurring a financial penalty.
• Mandatory Waiting Periods: The 12-day notice period before closing and the 3-day right to cancel after closing give you ample time to review and reflect on your decision.

Pros and Cons of a Texas HELOC

Understanding the benefits and drawbacks is key to making an informed choice.

Pros:

• Unmatched Flexibility: Borrow only what you need, when you need it. This is perfect for long-term renovation projects with uncertain costs or for establishing a robust emergency fund.
• Interest-Only Payments: The option to pay only the interest during the draw period can keep initial monthly payments low and manageable.
• Reusable Credit: As you pay down the balance, you can borrow those funds again without having to reapply.

Cons:

• Variable Interest Rate: Most HELOCs have a variable interest rate tied to a benchmark like the Prime Rate. If rates rise, your monthly payment will increase.
• Temptation to Overspend: The easy access to funds can make it tempting to use the credit line for non-essential purchases, increasing your debt.
• Complex Texas Rules: The specific state regulations, while protective, can add complexity to how you manage and use your line of credit.
• Your Home is the Collateral: This is the most significant risk. Failure to repay the loan according to its terms could lead to foreclosure.

The Application and Approval Process

Securing a HELOC in Texas involves a clear, regulated process.

1. Consultation and Application: The first step is to speak with a loan officer to discuss your needs and financial picture. You will then complete a formal application.
2. Documentation: You will need to provide financial documents, including recent pay stubs, W-2s, federal tax returns, and bank statements.
3. Appraisal and Underwriting: The lender will order an independent appraisal to determine your home’s fair market value. An underwriter will then review your entire financial profile to verify your creditworthiness, income, and DTI ratio.
4. Closing and Waiting Periods: Once approved, you will proceed to closing, keeping in mind the mandatory 12-day waiting period from application and the 3-day right of rescission after you sign.
5. Account Activation: After the 3-day rescission period expires, your HELOC account will be activated and ready for you to use.

A Home Equity Line of Credit in Texas offers a dynamic way to leverage your home’s value. Its flexibility makes it a superior choice for homeowners with fluctuating funding needs and the financial discipline to manage a variable-rate line of credit.

Ready to see how a HELOC can work for you? Apply for a HELOC with Herring Bank through our secure and straightforward online portal.

If you have questions, contact our mortgage specialists today. We’re here to help you understand your options and make the best choice for your financial future.