Texas law allows residents to create home equity lines of credit (HELOC) on the value of their homes for a variety of purposes. However, there are several rules that must be followed under penalty of law. These rules, which are clearly stated in Texas law, establish limits on HELOCs; control and regulate the loan process; ensure the financial best interests of both borrowers and lenders.
Definition of HELOC
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In Texas, a HELOC is defined as an "open-end account that may be debited from time to time, for which credit may be extended from time to time and which is subject to certain fees." It is different from a pure home equity loan and therefore is subject to slightly different rules. A HELOC draws out the equity in the home to be used at the owner's discretion as a line of credit. HELOCs accrues interest and must be repaid.
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Setting Up a HELOC
A homeowner sets up a HELOC through the mortgage lender or other entity that has financed the home. Payments that are made to the homeowner are called advances and are paid from the equity in the home (equity equals the original value of the home minus the debt on the home). Repayments of a HELOC are not required until two months after the initial advance. Any owner who is also a named borrower on the HELOC may take out an advance.
Requirements of HELOCs
Repayment of the HELOC must occur at regular intervals of no less than every two weeks and no more than monthly. Each payment must equal or exceed the amount of accrued interests. The HELOC may include provisions that prevent certain borrowers from taking advances or may require all borrowers to give statements of consent to any advances taken.
Prohibitions with HELOCs
A lender cannot charge prepayment penalties for a borrower paying a HELOC in advance. The borrower is given full discretion in paying the HELOC early. Only the home and no other property can be attached to the HELOC. A fee cannot be charged for taking out an advance. The HELOC cannot be secured with a credit card, debit card or preprinted check. The value of the principal of the first advance plus any debts on the home cannot exceed 80 percent of the fair market value of the home. Any additional advances cannot exceed 50 percent of the fair market value.