What Is a Home Equity Loan vs a HELOC
A home equity loan is a second mortgage that gives you a lump sum at a fixed interest rate with fixed monthly payments over a set term, typically 10 to 20 years. You receive the full amount at closing and begin repaying immediately. This works best when you know exactly how much you need.
A HELOC (home equity line of credit) is a revolving credit line secured by your home. You get approved for a maximum amount and draw from it as needed during a draw period, usually 5 to 10 years. During the draw period, you typically make interest-only payments on what you have borrowed. After the draw period ends, the loan enters repayment and you pay principal plus interest. HELOCs usually carry variable interest rates.
Home Equity Loan vs HELOC at a Glance
Home equity loan: Fixed rate, lump sum, predictable payments, best for one-time large expenses.
HELOC: Variable rate, revolving line, flexible draws, best for ongoing or uncertain expenses.
Both: Secured by your home, subject to Texas 80% CLTV cap, require appraisal and income verification.
Texas-Specific Home Equity Rules
Texas has constitutional protections on homestead property that create unique rules for home equity lending. These rules apply to every lender operating in Texas.
80% combined loan-to-value (CLTV) cap. The total of your first mortgage plus any home equity borrowing cannot exceed 80% of your home's appraised value. This is a hard cap under Texas law. There are no exceptions.
12-day cooling period. After you close on a home equity loan or HELOC, there is a mandatory 12-day waiting period before any funds are disbursed. This is a consumer protection built into the Texas Constitution.
3-day right of rescission. You have 3 business days after closing to cancel the loan without penalty. This right is part of the 12-day cooling period.
One home equity loan at a time. Texas law allows only one home equity loan or HELOC on your homestead at any given time. If you already have one, you must pay it off or refinance it before opening another.
Homestead protection. Your primary residence in Texas has homestead protections that limit forced sale for debt. Home equity loans are one of the few debt types that can result in foreclosure on a homestead property. This is why Texas imposes stricter rules than other states.
Cash-Out Refinance vs HELOC
Both let you access home equity. The structure is different. Here is a side-by-side comparison to help you decide which fits your situation.
Cash-Out Refinance vs HELOC Comparison
Rate type: Cash-out refinance has a fixed rate. HELOC typically has a variable rate.
Access method: Cash-out refinance delivers a lump sum at closing. HELOC provides a revolving line you draw from as needed.
Closing costs: Cash-out refinance has full mortgage closing costs (2% to 5% of loan amount). HELOC has lower closing costs, sometimes waived by the lender.
Timeline: Cash-out refinance takes 30 to 45 days. HELOC can close in 2 to 4 weeks.
When it makes sense: Cash-out refinance is best if your current mortgage rate is higher than today's rates and you want to consolidate into one payment. HELOC is best if your current mortgage rate is low and you do not want to replace it.
Texas rule: Both are subject to the 80% CLTV cap on homestead property.
If your current mortgage rate is 3% or 4% from a few years ago, a cash-out refinance would replace that low rate with a higher one. A HELOC lets you keep the existing mortgage untouched and borrow only what you need as a separate loan. For detailed refinance options, see: Refinance Houston.
Current Home Equity Rates in Houston
Home equity loan and HELOC rates depend on several factors specific to your situation.
Credit score. Higher scores get lower rates. A 740+ score qualifies for the best pricing. Scores in the 620 to 680 range still qualify but at higher rates.
Loan-to-value ratio. The less equity you borrow against, the better the rate. Borrowing 60% of your home's value gets a better rate than borrowing at the 80% Texas cap.
Loan amount. Very small equity loans (under $25,000) sometimes carry slightly higher rates due to fixed origination costs.
Lien position. Home equity loans in second lien position carry higher rates than a cash-out refinance in first lien position because the lender's risk is higher.
Brandon provides current rate quotes based on your specific credit, equity, and loan amount. Rates change weekly, so a live quote is the only accurate number.
How Much Equity Do You Have
Your available equity is the difference between what your home is worth and what you owe, minus the Texas 80% cap.
Equity Calculation Example
Current home value: $400,000
Current mortgage balance: $250,000
Total equity: $150,000
80% of home value (Texas cap): $320,000
Maximum borrowable: $320,000 minus $250,000 = $70,000
Even though you have $150,000 in equity, Texas law limits your borrowing to $70,000 on a home equity product because the combined debt cannot exceed 80% of the appraised value.
This calculation uses the appraised value, not the Zillow estimate or tax assessment. The lender will order an appraisal as part of the process. If the appraisal comes in lower than expected, the available equity decreases.
Uses for Home Equity
Debt consolidation. Pay off high-interest credit cards, auto loans, or personal loans. A home equity rate is typically much lower than credit card rates, which can save thousands in interest.
Home improvements. Kitchen remodel, bathroom renovation, roof replacement, HVAC upgrade, or room addition. Using equity for home improvements may also make the interest tax deductible.
Investment property down payment. Use your primary home equity to fund the down payment on a rental property. This is a common strategy among Houston real estate investors. See: Investment Property Loans Houston.
Education expenses. Fund college tuition or professional education without the restrictions of federal student loans.
Business capital. Start or expand a business. Home equity rates are often lower than business loan rates, though you are putting your home at risk.
Requirements
Home Equity Loan and HELOC Requirements
Credit score: 620 minimum for most programs. 680+ for the best rates.
Maximum CLTV: 80% under Texas law. No exceptions on homestead property.
Income verification: Pay stubs, tax returns, or bank statements depending on employment type. Self-employed borrowers may use bank statement documentation.
Property appraisal: Required. The lender orders an appraisal to confirm current market value.
Frequently Asked Questions
What are the Texas-specific rules for home equity loans?
Texas caps combined borrowing at 80% of your home's appraised value. There is a 12-day cooling period after closing before funds are released. You have a 3-day right of rescission to cancel. Only one home equity loan or HELOC can be outstanding on your homestead at a time. These are constitutional protections that apply to all lenders.
How long does it take to get a home equity loan in Texas?
Expect 30 to 45 days from application to funding. This includes the appraisal, underwriting, closing, and the mandatory 12-day cooling period. The cooling period alone means you will not have funds in hand until roughly 2 weeks after you sign closing documents.
Is home equity loan interest tax deductible?
Interest may be deductible if you use the funds to buy, build, or substantially improve the home securing the loan. Interest on funds used for other purposes like debt consolidation is generally not deductible. Consult a tax professional for your specific situation.
Can I get a HELOC on a rental property?
The Texas 80% CLTV rules apply to your homestead. Rental properties are not subject to the same constitutional restrictions. You can access equity in a rental through a cash-out refinance or investor HELOC with different terms and requirements. See: Investment Property Loans Houston.
What are the closing costs?
Closing costs typically run 2% to 5% of the loan amount. Texas law caps certain fees at 3% of the loan amount. Some lenders offer no-closing-cost options where costs are absorbed into the interest rate. Brandon provides a full cost breakdown before you commit.
Does a home equity loan affect my first mortgage?
No. A home equity loan or HELOC is a separate loan in second lien position. Your first mortgage rate, payment, and terms remain unchanged. The combined total of both loans cannot exceed 80% of your home's value under Texas law.
Get a Free Equity Analysis
Brandon calculates your available equity, explains the Texas rules that apply to your situation, and recommends whether a home equity loan, HELOC, or cash-out refinance makes the most sense. Free consultation, no obligation.
Related Resources
- Refinance Houston - Cash-out refinance and rate-and-term options
- Investment Property Loans Houston - Using equity for rental property purchases
- Conventional Loans Houston - Standard mortgage programs
- FHA Loans Houston - Government-backed purchase options
- Mortgage Pre-Approval Houston - Start the process today
Find Out How Much Equity You Can Access
Home equity loans, HELOCs, and cash-out refinance options for Houston homeowners. Brandon walks you through the Texas rules, calculates your available equity, and finds the best rate. Free consultation, no obligation.
Talk to Brandon About Your Home Equity