Home Equity Loans in Texas: The Complete Guide to Rules, Rates, and Requirements

Texas was the last state in the country to allow homeowners to borrow against their home equity. Even now, nearly three decades later, Texas home equity loans still run under a stricter set of rules than any other state, rules written directly into the Texas Constitution. Here is everything you need to know before you tap into your equity.

Texas Home Equity Snapshot Maximum combined loan-to-value (CLTV) allowed by law: 80% Maximum fee cap on the loan amount: 2% Median interest rate, Home Equity Loans in Texas: 7.24% (2023 HMDA data, CFPB) Median interest rate, HELOCs in Texas: 7.99% (2023 HMDA data, CFPB) Minimum HELOC draw amount required by law: $4,000 Mandatory cooling-off period before closing: 12 days Total home equity and HELOC originations in Texas (2023): 18,213 loans

Introduction

For most of its history, Texas did not let homeowners borrow against the roof over their heads. The homestead, protected from forced sale since 1840 under laws borrowed from Spanish and Mexican legal tradition, was treated as untouchable. Not even a lender could take it, outside a small handful of exceptions like unpaid taxes or the original purchase loan.

That changed on January 1, 1998, when a constitutional amendment took effect and Texas became the final state in the nation to permit home equity lending. Lawmakers did not just open the door, though. They built a detailed rulebook directly into Article XVI, Section 50 of the Texas Constitution, and that rulebook still governs every home equity loan, HELOC, and cash-out refinance closed on a Texas homestead today.

If you are a Texas homeowner considering pulling cash out of your property, understanding these rules is not optional reading. It shapes how much you can borrow, what a lender can and cannot charge you, and what protections you have if something goes wrong. This guide walks through all of it.

If you have not yet decided between building new and tapping equity to remodel, our Texas Home Construction Costs guide breaks down what a build actually costs across the state, and our companion piece on what a home equity loan is nationally covers the general mechanics that apply outside Texas.

Why Texas Home Equity Lending Works Differently

Every other state treats home equity borrowing largely as a private matter between a lender and a borrower, shaped by market practice and general consumer protection law. Texas instead wrote the core terms into its constitution, which means the rules cannot be changed by an act of the legislature alone. Any material change requires another statewide vote.

Two state bodies, the Finance Commission of Texas and the Texas Credit Union Commission, are authorized to interpret the constitutional language. Their interpretations live in Title 7 of the Texas Administrative Code, Chapter 153. In the 2014 case Sims v. Carrington Mortgage Services, the Texas Supreme Court held that a lender who follows those official interpretations is treated as compliant with Section 50, even if a court later decides the interpretation itself was wrong. That gives lenders a fair amount of legal cover, but it also means the practical rules borrowers experience come from the regulatory interpretations as much as from the constitutional text itself.

The Three Types of Loans Covered by Section 50

Texas home equity law applies to three distinct products, and the differences matter.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage entirely. The new loan is larger than the old balance, the old loan is paid off, and you walk away with the difference in cash. You end up with one loan and one monthly payment, but a longer path back to being debt-free on the home and a new closing cost bill.

Home Equity Loan

A home equity loan sits behind your existing mortgage as a second lien. It does not touch your first mortgage at all, which matters most for homeowners who locked in a low rate years ago and do not want to give it up. You end up with two separate payments. Because the lender is in second position, rates tend to run a bit higher than a cash-out refinance, but you keep your original loan intact and the loan can also be used on a home you already own free and clear.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving credit line rather than a lump sum. During the draw period, typically around ten years, you borrow what you need, repay it, and borrow again, usually making interest-only payments along the way. Once the draw period ends, the loan converts to a repayment period with fixed principal-and-interest payments. HELOCs generally carry lower closing costs than the other two options and work well for costs that arrive in stages, like a phased renovation, but the interest rate usually floats with the market.

Only one home equity loan or HELOC is allowed on a homestead at a time under Texas law, and a new one cannot be originated within 12 months of the last one, even if the previous loan has already been paid off.

The Core Constitutional Rules Every Texas Borrower Should Know

Article XVI, Section 50(a)(6) of the Texas Constitution lays out roughly a dozen specific requirements. These apply across cash-out refinances, home equity loans, and HELOCs alike.

The 80% Combined Loan-to-Value Cap

This is the rule most homeowners run into first. The total of your home equity loan plus every other debt secured by the home cannot exceed 80% of the home's fair market value on the day the loan is made. In plain terms, you must keep at least 20% equity in the home at all times. There is no lender workaround for this figure. It is fixed in the constitution.

The 2% Fee Cap

Total fees charged to the borrower cannot exceed 2% of the loan's original principal amount. Third-party costs like appraisals, surveys, title insurance, and title examination reports are excluded from that cap, as are bona fide discount points used to buy down the rate. This is one of the more borrower-friendly provisions in Section 50 and one that does not exist in most other states.

No Prepayment Penalties

Texas home equity loans cannot carry a prepayment penalty of any kind. If you come into extra cash and want to pay the loan down early or in full, there is no fee for doing so.

The Loan Can Only Be Secured by the Homestead

The lien cannot attach to any other property, and it cannot be secured by wages. Section 50 loans also cannot be made on a second home, rental property, or investment property. The Texas home equity rules apply strictly to primary residences.

Limits on Acceleration

A lender cannot call the loan due early just because the home's market value drops, or because the borrower defaults on some other unrelated debt that is not secured by a prior lien on the same property.

Substantially Equal Payments

Payments must be scheduled in substantially equal installments covering at least the accrued interest, due no more often than every 14 days and no less often than monthly, and must begin within two months of the loan closing.

Mandatory Disclosures and Timing

Borrowers must receive a specific written notice at least 12 days before closing. At least one business day before closing, the borrower must also receive a copy of the loan application and a final itemized breakdown of fees, points, interest, and costs. That itemized disclosure can only be modified on the closing date itself if there is a genuine emergency and the borrower gives written consent.

Closing Location

The loan has to close at the office of the lender, an attorney, or a title company. It cannot be closed at the borrower's home or anywhere else.

Who Can Actually Lend

Not every lender is authorized to originate a Section 50 loan. Eligible lenders include Texas or federally chartered banks, savings institutions, and credit unions, along with mortgage bankers, mortgage companies, and other entities licensed and regulated by the state of Texas.

A Three-Day Right to Rescind

After closing, the borrower has three days to cancel the loan entirely, without penalty or cost.

No Personal Liability, Judicial Foreclosure Only

This is one of the more unusual protections. A Texas home equity loan must be made without recourse against the borrower personally. If the borrower defaults, the lender's only remedy is to foreclose on the home, and even that foreclosure must go through a court order rather than the faster non-judicial process used for most other liens in Texas. This adds time and legal steps that work in the borrower's favor compared to other types of Texas mortgage debt.

Forfeiture for Non-Compliance

If a loan does not meet the constitutional requirements and the lender does not fix the problem within 60 days of being notified, the lender forfeits all principal and interest on the loan. The constitution allows certain defects to be cured, including refunding overcharges, which gives lenders a path to correct honest mistakes without losing the entire loan.

Special Rules That Apply Only to HELOCs

Because a HELOC works differently from a lump-sum loan, Texas law layers on a few additional requirements specific to lines of credit.

• $4,000 minimum draw. Every individual advance during the draw period must be at least $4,000. You cannot make small, frequent withdrawals.
• No card-based draws. Borrowers cannot use a credit card, debit card, or similar device, or an unsolicited pre-printed check, to draw against the line.
• Interest-only draw period payments. Payments during the draw period only need to cover at least the accrued interest.
• No balloon payments in repayment. Once the draw period ends, payments must be substantially equal for the remainder of the term. A lump balloon payment at the end is not allowed.
• Fees collected upfront only. Any fees tied to the HELOC must be charged at the start of the line. Lenders cannot charge a fee every time you draw or make a payment.

Home Equity Loan vs. HELOC vs. Cash-Out Refinance in Texas

Note that median LTV figures reported to the CFPB run well below the 80% legal ceiling, meaning most Texas borrowers are not maxing out the equity available to them. The 95th percentile CLTV for home equity loans in the same dataset reached 84.22%, close to, but generally still within, the constitutional cap once appraisal adjustments are factored in.

What Texas Borrowers Are Actually Doing: The 2023 Data

According to Home Mortgage Disclosure Act data compiled by the Consumer Financial Protection Bureau and cited by the Texas Real Estate Research Center at Texas A&M University, Texans took out a combined 18,213 home equity loans and HELOCs in 2023, alongside 42,243 cash-out refinances. Median loan amounts ran around $85,000 for both home equity loans and HELOCs, on properties with a median value between $415,000 and $485,000 depending on the loan type. Cash-out refinance borrowers pulled a larger median amount, around $155,000, reflecting the fact that a cash-out refinance restructures the entire mortgage rather than layering a smaller second loan on top of it.

Can Interest on a Texas Home Equity Loan Be Deducted?

Under current federal tax rules, interest on a home equity loan or HELOC is deductible only if the borrowed funds are used to buy, build, or substantially improve the home securing the loan, and only up to the combined mortgage debt limits set by federal law. If the proceeds go toward debt consolidation, tuition, or anything unrelated to the home itself, the interest generally is not deductible. Tax treatment depends on your specific situation, so this is a conversation to have with a tax professional rather than something to assume applies automatically.

Step by Step: Getting a Home Equity Loan in Texas

1. Confirm your equity position. Pull your most recent mortgage statement and get a current value estimate for your home. Subtract what you owe from what it is worth, then apply the 80% CLTV cap to see your realistic borrowing range.
2. Choose an authorized lender. Confirm the institution is a bank, credit union, or licensed mortgage company authorized to originate Section 50 loans in Texas. Many Texas credit unions publish home equity loan and HELOC products side by side specifically to help borrowers compare structures.
3. Apply and submit documentation. Expect to provide income verification, your current mortgage balance, the property's tax-assessed value, and personal information for every owner on the title, since Texas requires the consent of every owner and spouse.
4. Receive your 12-day disclosure. By law, this notice must arrive at least 12 days before closing. This is the mandatory cooling-off period and it cannot be waived.
5. Review your final itemized disclosure. At least one business day before closing, you will receive the loan application and an itemized breakdown of every fee, point, and cost.
6. Close at an approved location. The closing has to happen at the lender's office, an attorney's office, or a title company, never at your home.
7. Use your three-day right to rescind. After signing, you have three full days to cancel the loan without any penalty.
8. Funds are disbursed. Once the rescission period passes, funds are released, typically within a few business days. Most Texas lenders quote a total process time of around 45 days from application to funded loan.

Common Questions About Texas Home Equity Loans

Why did Texas wait so long to allow home equity loans?

Texas homestead protections trace back to 1840 and were treated as close to inviolable for well over a century. Lawmakers and voters were cautious about opening homes up to forced sale through debt, and it took a 1997 constitutional amendment, effective January 1, 1998, to finally permit home equity lending under a tightly controlled framework.

Can I get a home equity loan on a rental property or vacation home in Texas?

No. Section 50 home equity loans apply only to a homestead, meaning your primary residence. Investment and vacation properties are not eligible for this specific loan type, though a cash-out refinance structured differently, or other lending products, may be available depending on the lender.

What happens if my home's value drops after I take out a home equity loan?

The lender cannot accelerate the loan and demand full repayment simply because the home's value declined. This is a specific protection built into Section 50.

How much am I allowed to borrow?

The total of your home equity loan plus any other debt secured by the home cannot exceed 80% of the home's fair market value at the time of the loan. Some products may advertise slightly different structures, but 80% CLTV is the hard constitutional ceiling in Texas.

Can a Texas home equity loan be foreclosed on quickly, like other liens?

No. Unlike most Texas liens, a home equity loan can only be foreclosed through a court order, following a specific procedure under the Texas Rules of Civil Procedure. This judicial requirement adds time and legal process that does not apply to standard non-judicial foreclosures elsewhere in Texas mortgage law.

Is there a minimum amount I have to draw from a Texas HELOC?

Yes. Each individual advance during the draw period must be at least $4,000. You cannot make smaller draws, and you cannot access the line through a card or unsolicited check.

Bottom Line

Texas homeowners have access to a real, effective tool for unlocking the value built up in their homes, but it comes wrapped in more legal structure than almost anywhere else in the country. The 80% CLTV cap, the 2% fee limit, the mandatory 12-day disclosure period, and the judicial foreclosure requirement all exist for the same reason: to keep homeowners from over-borrowing against the one asset the Texas Constitution has protected since 1840. Understanding those rules before you sign anything is the difference between using home equity as a smart financial tool and turning it into a liability you did not fully see coming.

This article references data and legal analysis from the Texas Real Estate Research Center at Texas A&M University, the Consumer Financial Protection Bureau's Home Mortgage Disclosure Act data, and publicly available lending information. This article is for informational purposes only and does not constitute legal, tax, or financial advice. Consult a licensed attorney or financial professional before making borrowing decisions secured by your home.

Related Reading on Buildority Times

• What Is a Home Equity Loan? How It Works, Rates, and When It Makes Sense covers the national mechanics of home equity loans outside of Texas's unique constitutional framework.
• Texas Home Construction Costs: What to Budget for Your Build is useful if you are weighing a home equity loan against building new.
• Home Construction Loan Guide: Types, Requirements, and How to Apply covers financing for ground-up builds, a different path than tapping equity in an existing home.

Elvson Wallacy

Editor in Chief

Elvson Wallacy brings over 2 years of experience analyzing US housing markets, construction costs, and real estate trends. Their work focuses on macro market trends and builder strategy.

In This Article

• Introduction
• Why Texas Home Equity Lending Works Differently
• The Three Types of Loans Covered by Section 50
• The Core Constitutional Rules Every Texas Borrower Should Know
• Special Rules That Apply Only to HELOCs
• Home Equity Loan vs. HELOC vs. Cash-Out Refinance in Texas
• What Texas Borrowers Are Actually Doing: The 2023 Data
• Can Interest on a Texas Home Equity Loan Be Deducted?
• Step by Step: Getting a Home Equity Loan in Texas
• Common Questions About Texas Home Equity Loans
• Bottom Line
• Related Reading on Buildority Times

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