Home Equity Loan

Home equity is the present market value of your home minus all debts incurred against it. One big advantage of investing in real estate is that the property price increases steeply over time. If you have an expensive homestead and you have paid most of the mortgage, you might want to get some benefit from the present value of the property by taking another loan against it. Mostly people opt for this financial product for repairing home, or pay other bills like medical expenses, or educational expenses. However, a home equity loan creates a lien against your homestead, and reduces the actual home equity.

Being a Texan brings you some special advantages in this respect. Traditionally Texas laws are written with sole intention of protecting you and your homestead. Therefore, before 1997, there was no existence of home equity loan in Texas. Because, home equity loans are closed type and of secured nature. “The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower.”

However, finally the Texas estate laws were amended to permit home equity loans with provision of the strongest consumer protections in the United States. To ensure validity of your home equity loan, you need to understand these provisions:

  • Total amount of debt against your home should not exceed 80% of its fair market value. For example, if your house costs $70,000 and you have a mortgage of $30,000. You can get a home equity loan of at most $26,000.
  • You can take one home equity loan at a time against your home.
  • You can take one home equity loan per year.
  • Part of your farmstead that is taxed as ‘agricultural land’ or ‘open land’ should not be used for getting a home equity loan.
  • You should not take loan from an unlicensed person, unless he is providing ‘seller-financing or related to you within the second degree’.
  • Your lender will charge you some money called closing fees, apart from the interest for the loan, but it should not exceed 3% of the principal amount of the loan.
  • You are free to use the fund for any lawful purpose.
  • The home equity loan should be secured only on your homestead, no other asset should be mortgaged for this purpose.
  • The loan may be closed only at the permanent office of a lender, a title company, or an attorney’s office.
  • The loan cannot close until 12 days after you have made application for the loan and received a special notice of the borrower’s rights.
  • Before the day prior to closing, you must receive a final itemized disclosure of the actual fees, points, interest, costs, and charges that will be charged.
  • After the loan closes, you will have three additional days to change your mind and cancel the transaction without any penalty or charge. The loan proceeds should not be delivered before this.
  • The lender is not permitted to conduct a private foreclosure; all home equity loan foreclosures must be ordered by a court.

A little thought on the above-mentioned provision will reveal that, these laws are written keeping you, the homeowner in mind. Still there are unscrupulous lenders who try to find the loopholes and trap you into a foreclosure. Therefore, it is wise to think and take advice before getting a home equity loan. If you take a home equity loan to pay your credit card bill or other such unsecured loans, you are converting your unsecured loan to a secured loan. Home being your most important asset, you must take utmost care.

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