With the recent spike in real estate values, I often have customers ask about their home equity and how to use it. Most people refer to this as a cash-out refinance. First let’s start with the definition from investorwords.com. Home equity is essentially the current market value of your home minus the outstanding mortgage balance. In other words, home equity is the amount of ownership that has been built up by the holder of the mortgage through loan payments and market appreciation of the home.
Each owner has different reasons for wanting to utilize their home equity: to do home improvements, to pay off debt, to pay for college education, etc.. The amount you can borrow is limited by the type of property you own, the loan amount, by lending guidelines and by various state laws. For example, you can borrow more against a primary home than an investment property. Another example, though state law may allow you to borrow 80% of the value of your $1mm home, lending guidelines may limit you to say, 65% or 75% of the value.
Different loan products can also deliver the same results depending on your goals. For example, if you want to use the home equity to remodel your kitchen, perhaps a home improvement loan is a better solution because of state laws or delivering a better rate. Another example may be for small amounts. Perhaps you need only $10K and your rate is already low. We may want to think of a small 2nd loan. That may save you closing costs. Finally, as one can guess, the lending guidelines become more restrictive when you want money back out. Borrowers need higher credit scores, rates can be higher than a rate/term refinance and the lender may require more reserves in the bank.
For you Texans!
Texas is special. Texas is different. Thus, Texas has its own home equity laws. Technically, this is called a Texas 50(a)6 transaction. Due to Texas’ Homestead Laws, we are allowed to lend up to 80% of the equity of your home while giving you cash. The equation is simple: appraised value x .80 less all liens and any closing costs. What makes Texas different is this: once you enact a cash-out refinance, your property will always have this nomenclature until you sell it or pay-off the lien. The law allows you to refinance only once per year. Possible future loans (especially renovation loans) will be negatively affected. Additionally, the title policy endorsements are at a higher cost. The fines for lender and title errors are huge, so many lenders don’t even offer a cash-out solution for Texas: especially jumbo loans.
If you have more questions or would like to discuss your home equity in more detail, feel free to contact me for a complimentary and confidential consultation.