On Nov. 7, Texas voters have the opportunity to change the rules so they can more easily access the hard-earned equity they’ve built in their homes. This is made possible through Proposition 2, and I urge all Texans to vote yes.
Proposition 2 proposes greater choice and flexibility in refinancing homes. For most Texans, their homes are their most valuable assets and, thanks to a strong economy, most homes have appreciated significantly in value over the last decade. Proposition 2 makes important changes to the existing home equity rules to better allow Texans to access their increased equity for whatever reason they choose — whether to pay for college, to pay medical bills or to pay off higher interest credit cards.
First, Proposition 2 will enable more Texans to obtain home equity loans by lowering the maximum permitted fees that can be charged in connection with the loan, and by exempting from the calculation certain charges a lender necessarily incurs in originating the loan. Under Texas law today, many Texans simply can’t obtain a home equity loan even if they own their home free and clear because the lender cannot make the loan profitably. For loans under $100,000, the expenses incurred in originating the loan often exceed the current fee limitation of 3 percent of the loan amount. Under Proposition 2, the fee limitation will be reduced to 2 percent. But because the lender will not have to count the largest third-party fees incurred in the transaction (title insurance fees, survey costs, and appraisal fees), more Texans than ever will be able to borrow money against their homes. Such loans are often the most cost-effective means to obtain new funds available, particularly since the interest on such loans is often tax-deductible.
Second, Proposition 2 will allow Texans to refinance a home equity loan as a regular refinance under certain circumstances, when no additional funds are being obtained by the borrower. Under current law, a loan to pay off a home equity loan is also treated as a home equity loan, even if no new money is taken out by the homeowner. These loans typically have a higher interest rate than a non-home equity loan. By allowing such loans to be refinanced as a standard refinance instead of as another home equity loan, Proposition 2 will potentially save Texans significant dollars in future interest expense.
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Third, Proposition 2 removes an impediment to many rural Texans obtaining a home equity loan. Rural property owners often enjoy reduced property taxes if a portion of the property is subject to agricultural use. Unfortunately, under the Texas Constitution, a lender is legally prohibited from making a home equity loan if the property is subject to an agricultural tax exemption. Rural homeowners are forced to choose between keeping this important tax benefit or obtaining a home equity loan. Under the current law, homeowners desiring a home equity loan are forced to remove the agricultural use tax exemption, which can expose the homeowner to significant tax liability for the tax savings they have enjoyed for all or a portion of prior years, as well as force the homeowner to forgo tax savings in the future. Proposition 2 will allow Texans who own farm homesteads to obtain a home equity loan without losing these important tax savings.
Finally, Proposition 2 will enable Texans who choose a home equity line of credit to obtain future draws up to the full 80 percent of the value of the property, irrespective of when the draw is made. Under current law, the borrower can draw 80 percent of the value of the property as an initial draw under a HELOC, but the aggregate of future draws are limited to 50 percent of such value. So, for example, if a home with no liens is worth $250,000, the borrower could obtain a HELOC and draw $200,000 (80 percent of the value of the property) in the first draw. However, if the initial draw was only $100,000, future draws would be limited to 50 percent of the property’s value at the inception of the HELOC, so that the balance of the loan as a result of the new draw could not exceed $125,000. Proposition 2 will provide Texans important flexibility in drawing down the home equity line of credit based on their individual financial needs.
Proposition 2 will expand Texans’ choice and flexibility in leveraging their most important asset — their home —w hile retaining the important protections of the homestead that Texas law currently affords. Vote Yes on Proposition 2!
Marty Green is a Dallas attorney with Polunsky Beitel Green, a residential mortgage law firm.