**Title: Understanding Home Equity Loans and Cash-Out Refinances in Texas**
**Introduction**
Homeowners across the United States had approximately $16 trillion in home equity as of February 2024, according to ICE Mortgage Technology. The average homeowner has $193,000 in equity that could be withdrawn while still leaving 20% equity in their home. This substantial amount of home equity presents an exciting opportunity to achieve home improvement and financial goals. If you reside in Texas, there are specific rules you should be aware of. While O1ne Mortgage Inc. does not offer home equity loans in Texas, we do provide cash-out refinances. Heres everything you need to know about home equity loans and cash-out refinances in Texas.
**Texas Rules for Cash-Out Refinances and Home Equity Loans**
To understand what makes Texas unique regarding cash-out refinances or home equity loans, its essential to discuss two provisions of the Texas Constitution: 50(a)(6) and 50(f)(2).
**Texas 50(a)(6)**
Texas 50(a)(6) is part of a section in the Texas Constitution that covers special protections for residents regarding their homestead, usually their primary residence. Here are some key guidelines:
– **2% Rule**: Homeowners or their spouses cant be required to pay more than 2% of the principal on the new loan in closing costs, excluding exceptions for discount points, appraisal fees, land survey costs, lenders title policy, and title search costs.
– **Loan Agreement**: The loan must be agreed upon by the homeowner and their spouse.
– **Combined Loan-to-Value Ratio (LTV)**: The combined LTV cant exceed 80% of the homes fair market value, meaning at least 20% equity must remain after the loan closes.
– **Single Loan Rule**: Only one loan with 50(a)(6) provisions is allowed, so if you previously did a cash-out refinance, a home equity loan isnt an option while the terms of the 50(a)(6) persist.
**Texas 50(f)(2)**
Once you complete a Texas 50(a)(6) transaction, every subsequent refinance must follow the requirements for a 50(a)(6). However, if youre looking to lower your rate or change your term without taking cash out, you can do a Texas 50(f)(2) refinance to remove the 50(a)(6) provisions. Benefits of a 50(f)(2) loan include:
– **FHA or VA Loan Eligibility**: You can qualify for an FHA or VA loan, which have more flexible qualification requirements.
– **Conditions**: The existing 50(a)(6) loan must be at least a year old, the new loan cant exceed 80% of the homes value, and theres a 12-day disclosure notice timeframe.
**Cash-Out Refinance vs. Home Equity Loan**
**Cash-Out Refinance**
A cash-out refinance involves taking a new loan with a larger balance, potentially changing the interest rate and term, but resulting in one mortgage payment. The interest rate is typically lower than a home equity loan due to the lenders first lien position, which reduces their risk.
**Home Equity Loan**
A home equity loan is a second mortgage in addition to your primary mortgage. This option might be suitable if your existing interest rate is low, making it financially sensible to keep your current mortgage rate and take a second loan. However, interest rates on a second mortgage are higher due to the increased risk for the lender.
**Deciding Which Option Is Right for You: Blended Rates**
A blended rate helps you determine the effective interest rate across both payments after taking out a home equity loan. If the effective interest rate is lower than the cash-out refinance rate, a home equity loan is preferable. Otherwise, a cash-out refinance makes more sense. Heres a simplified formula:
[ text{Blended Rate} = left( frac{text{Current Mortgage Balance} times text{Current Interest Rate}}{text{Total Loan Amount}} right) + left( frac{text{Home Equity Loan Amount} times text{Home Equity Loan Rate}}{text{Total Loan Amount}} right) ]
For example, if you have $200,000 remaining on your mortgage at a 3.5% interest rate and want to take out $50,000 in equity at 9.5%, compare this to a cash-out refi at 7.5%. The blended rate calculation will help you decide the best option.
**Conclusion**
A Texas 50(a)(6) loan provides specific protections for Texans looking to take cash out or do a home equity loan on their primary residence. Whether a home equity loan or cash-out refinance is right for you depends on your financial situation and the math involved. A Home Loan Expert can assist you with this calculation.
While home equity loans arent available in Texas at this time, O1ne Mortgage Inc. offers cash-out refinances. If you decide this is the right option for you, you can apply online at [O1ne Mortgage Inc.](https://o1nemortgage.com) or call us at 888-372-8820.
**Keywords**: Home equity loans, cash-out refinances, Texas mortgage rules, Texas 50(a)(6), Texas 50(f)(2), home improvement loans, mortgage refinancing, O1ne Mortgage Inc.
