Home equity loans are loans secured by a Texas homestead as to which the Bank has no recourse against the borrower other than foreclosure of the lien on the homestead. Home equity loans were first allowed in Texas in 1997 and required an amendment to the Texas Constitution. In 2003 the Texas Constitution was further amended to permit home equity lines of credit (HELOCs). Home equity loans are subject to strict and numerous legal requirements.
On January 1, 2018, a third home equity reform constitutional amendment (the “Amendment”) went into effect. It contains three significant changes.
•The Amendment lowered the cap on fees that are associated with a home equity loan. Previously the Constitution set this cap at three percent (3%). The amendment lowered this cap to two percent (2%) but excludes survey fees, appraisal fees and title insurance and title report fees from the fee cap. As a result, even though the amount of fees that can be charged are less, because the Amendment eliminated from the constitutional fee cap fees that are not generated by the lender, the Amendment makes home equity lending more attractive for Texas banks.
•The Amendment allows for a borrower to refinance a seasoned home equity loan (i.e., one that has been on the books for at least one year) into a non-home equity loan. This change gives borrowers the ability to refinance an existing home equity loan into a non-home equity loan, the rate terms of which will likely be better.
•The Amendment eliminates the constitutional prohibition on home equity loans on properties that have agricultural use exemptions. This change ensures that rural Texans whose homesteads are on their working farms or ranches have the ability to tap into their homes’ equity. For home equity loans originated prior to January 1, 2018 property designated as “agricultural use” property under the property tax laws could not be used as collateral for an equity loan unless the property was primarily used for the production of milk.
The Amendment only applies to home equity loans originated or refinanced after January 1, 2018.