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Texas cash-out refinance: new laws you need to know

Erik J. Martin
The Mortgage Reports contributor

In this article:

In 2017, state voters passed new laws affecting the Texas cash-out refinance loan. Texas borrowers should take note of these friendlier rules. Among the changes:

  • You can now refinance into a conventional loan (without a cash-out) at least one year after getting a Texas cash-out refinance loan
  • If you use your land for agricultural purposes, you can now qualify for a Texas cash-out refinance loan
  • The fee on this loan lowers from 3 percent to 2 percent

A Texas cash-out refinance loan can offer plenty of benefits, such as lowering your mortgage rate, obtaining extra funds for anything from a new car to college tuition to funding a business, and you may also be able to shorten your repayment.

Verify your new rate (Dec 14th, 2018)

The Texas cash-out refinance loan explained

A Texas cash-out refinance loan is also called a Section 50(a)(6) loan. With this option, you refinance your current mortgage while also tapping into your home’s equity. This tapped equity converts into cash paid out at closing. The cash can be used for anything you’d like, from home improvements to paying off higher-interest debt.

A Section 50(a)(6) loan can be a good option if you want to refi and need extra cash. You can get a fixed interest rate. That offers more stability and better peace of mind than a home equity line of credit’s (HELOC) variable rate. Plus, your mortgage interest may be tax deductible. (Check with a professional first, as recent changes to the tax law apply.)

“Any homeowner is eligible for this Texas cash-out refinancing loan. You simply need to have earned more than 20 percent equity in your home,” says Herb Ziev, a Certified Mortgage Planning Specialist in Texas.

Mary Dinkins, regional vice president with Cornerstone Home Lending in Dallas, says any primary residence qualifies so long as it doesn’t exceed 10 acres.

“Rural properties can be considered up to 100 acres,” she adds.

The home equity fine print

But note that Texas has unique laws when it comes to cash-out loans and home equity. In Texas, the maximum loan-to-value (LTV) you can get for your primary residence is 80 percent, adds Ziev.

Related: How does a home equity loan work? 

Say your home is worth $200,000 and you’ve earned 60 percent equity. In this case, you can borrow 40 percent of your home’s equity. That equates to $80,000 you can cash out. The 20 percent of your home’s value that remains—$40,000—must stay put.

“A Texas cash-out refinancing is different from a normal cash-out refi due to Texas’ very specific home equity laws,” says Ziev. “Other states allow borrowing a higher amount.”

New changes that improve this loan

In November 2017, Texas voters chose to amend the Texas Constitution. This changed the rules related to home equity lending. As a result, the Texas cash-out refinance loan is friendlier and more flexible to borrowers today. Here are four reasons why:

You can refinance your Texas Section 50(a)(6) loan in the future to a conventional rate-and-term refi without taking cash out. But you must wait at least 12 months from the date of your Texas cash-out refi closing. “In the past, if you had a cash-out mortgage or any kind of home equity loan you wanted to refinance, you needed to refi using the same type of Texas cash-out refi loan.

Related: Cash-out refinance vs home equity loan: The better deal might surprise you

This was true even if you didn’t want to take out cash,” Ziev adds. “Now, you can refi with a conventional loan at a potentially lower interest rate. And a conventional loan refi with no cash taken out may allow you to borrow at a higher LTV than 80 percent.” For instance, you can refi via a non-cash-out FHA loan up to 97.75 percent.

The fees on the loan have decreased to 2 percent. Before, they were 3 percent of the original loan amount. Note that the fee doesn’t include appraisal and survey costs, title insurance premiums, a title exam report, or discount points used to buy down the interest.

Agricultural homesteads are now eligible. “Say you’re using your land for agricultural or ranging purposes, like a farm. Now, you can qualify for this loan. And you can file for an agricultural exemption, which will lower your property taxes,” Ziev says.

The list of “authorized lenders” approved to make these loans has grown. Savings and loan associations, credit unions, bank subsidiaries, mortgage companies, and mortgage bankers are now included.

Other rules of note

Some other rules also apply that haven’t changed, according to Ziev. One is that Texas Section 50(a)(6) refinances on government loans like VA, FHA and USDA loans are not permitted.

In addition, you are legally allowed to get a Texas cash-out refinance loan only once per year. Whether you pursue a new Section 50(a)(6) loan or a conventional cash-out rate-and-term loan, 20 percent equity in your home must remain untouched.

Related: Home equity loan vs HELOC

Also, you can’t take out a HELOC (second lien) if you already have a Texas cash-out loan in place.

“If you took equity out on a first lien, you are not eligible for a new home equity loan,” says Dinkins. Still need extra cash? You can refi again using a Section 50(a)(6) loan or conventional cash-out refi loan, she adds.

Lastly, Texas cash-out refinance loan rules only apply to your primary residence. In other words, investment properties or second homes are not bound by these rules.

Verify your new rate (Dec 14th, 2018)