Texans will receive many benefits thanks to passage of Proposition 2 in the Nov. 7 election. This constitutional amendment will reform home equity restrictions in Texas. These benefits include making smaller-dollar loans more available to homeowners, providing greater flexibility for home equity lines of credit, opening up agricultural exemption properties as collateral for home equity, and eliminating the rigid concept of “once a home equity, always a home equity.”
What this law does:
• Lowers the current 3-percent fee cap on lenders to 2 percent. At the same time, it removes from the fee calculation several third-party fees outside the lenders’ control including: the appraisal, survey, and title costs. This change will increase access to smaller-dollar home equity loans by borrowers.
• Enables flexibility for Home Equity Lines of Credit (HELOCs). Today, if a homeowner chooses a traditional home equity loan they can borrow up to 80 percent of the Loan to Value (LTV), but they must take all the cash at the origination of the loan. If a borrower were to choose a more conservative HELOC, only accessing the cash they need over time through multiple draws, the maximum loan they can get is below 50 percent LTV. This amendment will provide protection of equity and savings in interest expense by allowing HELOCs also to comprise up to 80 percent of LTV.
• Makes agriculturally exempt homes eligible for home equity loans. Current law prohibits a home equity loan on property that is designated for agricultural use unless the property is used primarily for milk production. The amendment will remove this restriction and allow homesteads with an agricultural exemption to be eligible for home equity loans.
• Enables refinancing of home equity loans as mortgages. The current refinance obstacle will be removed and a home equity loan that has been in place for at least one year could be refinanced as a regular mortgage. The refinance will no longer be subject to the higher costs associated with currently refinancing a home equity loan.
These improvements to Texas homeowner are so beneficial that Proposition 2 had the support of trade groups representing mortgage lenders in all types of financial institutions, real estate agents and title companies. These provisions are scheduled to take effect Jan. 1.
Foster is the director of regulatory affairs at Polunsky Beitel Green, a residential mortgage law firm in San Antonio.