Home Equity Laws

Home equity is what your home is worth less the amount that you still owe on it. Laws governing home equity vary by state, with Texas law being relatively strict and protective of the homeowner while laws in other states may favor lenders. So, homeowners should know the laws of their respective states before making home equity loans.

Limited Access

Some states limit the amount you can borrow with a home equity loan while others leave it up to the lenders. For example, in Texas, the total amount that you can borrow on your house is 80 percent of its appraised value, less the amount of your first mortgage. Let's say, for example, that your home is appraised for $80,000 and your current mortgage is $30,000. You can borrow $34,000 (80 percent of $80,000, less $30,000.) Other states are silent on this issue, so borrowers often get loans for the full amount of the appraisal, or even more -- less the amount they currently owe, of course.

Number of Loans

There have been times when the value of real estate skyrocketed in parts of the country, so borrowers made multiple loans on their properties. Some owners have six or more of these loans, in addition to the first mortgage. However, other states have enacted laws prohibiting lenders from making multiple loans on their homes. On the federal level, The Truth in Lending Act prohibits lenders from lowering the amount available in a home equity line or accelerating the due date of the balance unless the borrower has either committed fraud or is behind on the payments.

Cooling Off Period

Some states insist that borrowers be given time to decide whether to sign on the dotted line. In most instances, borrowers have 72 hours to make up their minds after they have been approved for the loan. In Texas, borrowers have 12 days after they receive a notice of borrower's rights to decide.

Be Cautious

Home equity loans are serious business. For example, if you should become ill or lose your job and you are unable to keep up with the monthly payments on your home equity loan, you will risk losing your home as a result of your lender foreclosing on it. Another danger is that after you made the loan, your real estate could go down in value. You might owe more on it than its appraised value, but you will be obligated to make the monthly payments anyway.