Frequently Asked Questions

Why do we need Proposition 2? What does it do?

There are several reasons you should vote for Proposition 2:

  • Prop 2 will give more Texans the option to use home equity loans. Under the current structure, it’s very difficult, if not impossible, for lenders to issue home equity loans on properties below a certain value because of the way the Texas Constitution restricts fees that can be charged to create a home equity loan. For those smaller loans, the math just doesn’t work under current law. Prop 2 changes the calculation of the fees, thereby making the loans accessible to more Texans.

  • Prop 2 will allow owners of a homestead on all types of agricultural land to secure a home equity loan. Currently, only agricultural homesteaded land used for milk production qualifies for a home equity loan – owners of other types of agricultural homesteads cannot take home equity loans.

  • Prop 2 will create more options for homeowners who want to refinance an existing home equity loan.

  • Prop 2 will offer homeowners more economic freedom by enabling access to larger home equity lines of credit (HELOCs).

What is home equity?

If you borrowed money to buy your home, the lender still has an interest in the property until the loan is paid off. Your equity is the part of the property that you own. To calculate equity, subtract any outstanding loan balances from the property’s market value. For example, you took a $150,000 loan to buy your home. You’ve paid back $45,000 of it and the home is now worth $200,000. You have $95,000 of equity.

What is a Home Equity Loan?

Home equity loans allow homeowners to borrow against their home’s equity and make monthly payments on the loan.

Why do people take home equity loans?

Home equity loans may be helpful to homeowners who want to take on a home-improvement project, send a child to college, pay off high-interest debt, pay medical bills, or address other life expenses.

Will Proposition 2 raise the cost of a home equity loan?

No! Prop 2 changes the way home equity loan origination fees are calculated, but does not change what the fees actually are. The Texas Constitution says that fees to create a home equity loan can’t exceed 3 percent of the loan value. So if you get a $100,000 home equity loan, your origination fees would be capped at $3,000. Prop 2 would lower the cap on fees for home equity loans from 3 percent to 2 percent, so your bank could now only charge $2,000 in fees on that $100,000 loan. Fees charged for an appraisal, property survey, and title insurance would be excluded from the 2 percent calculation.

I have a home-equity loan that I want to refinance. How will Prop 2 help me?

Current provisions in the Texas Constitution say that a home equity loan must always stay a home equity loan – so right now, you cannot refinance your home equity loan into a different type of loan. Proposition 2 would allow you the option to refinance a seasoned home equity loan (“seasoned” means the loan was issued more than one year prior to the refinance) as another home equity loan or as a standard loan. A borrower may want to pursue this option to get a lower interest rate or consolidate debt.

Will Prop 2 make it easier for the bank to foreclose on my home?

No! Home equity loans and lines of credit will still have the same constitutional protections against foreclosure that have been in place since the voter-approved law was enacted in 1998. If Proposition 2 passes, a borrower who has had a home equity loan for more than a year could choose to refinance that loan to a standard loan. If the borrower chooses that type of refinance, they must sign disclosure statements acknowledging that they are giving up the constitutional home equity loan protections.

Would Proposition 2 eliminate consumer protections from the Texas Constitution?

No! Proposition 2 does not change the provisions that have protected Texas homeowners who have used home equity loans and lines of credit for the past twenty years.

How does the Texas Constitution protect Texas homeowners?

Texans who take out home equity loans benefit from strong consumer protections, enshrined in the Texas Constitution. Those protections include rules that helped Texas weather the Great Recession, such as:

  • The 80% loan-to-value ratio: A homeowner cannot take out a home equity loan that equals more than 80 percent of their home value – so if your house is worth $200,000, you cannot get a home equity loan of more than $160,000. This means that 20 percent of the equity in your home is always protected.

  • Non-recourse loans: A home equity loan in Texas is considered a “non-recourse” loan. This means that if you default on your home equity loan and the bank forecloses, but the house is now worth less than the total loan amount, the bank cannot hold you personally liable for the remaining outstanding balance.

Is a home equity loan like a reverse mortgage?

No! These are very different loan products.

Home equity loans allow homeowners to borrow against their home’s equity and make monthly payments on the loan. Home equity loans may be helpful to homeowners who want to take on a home-improvement project, send a child to college, pay off high-interest debt, pay medical bills, or address other life expenses.

A reverse mortgage is a financing program for homeowners 62 years and older, who have little or no mortgage debt. The bank agrees to pay the homeowner a lump sum or installments (basically a mortgage, but in reverse!), until the homeowner passes away, sells the property or permanently moves out. Following that kind of change in ownership or occupancy, the homeowner (or their heirs) must repay the lender, or the bank will take possession of the house. This type of loan may be attractive for homeowners who want to supplement retirement income and are not concerned with leaving behind property for their relatives or friends to inherit.

Can I get a home equity loan for my agricultural homestead?

Currently, only agricultural homesteaded land used for milk production qualifies for a home equity loan – owners of other types of agricultural homesteads cannot take home equity loans.

Prop 2 would allow owners of a homestead on all types of agricultural land to secure a home equity loan.

CONTACT US

For more information on Proposition 2, contact us at:

Texas Association of REALTORS®

Phone – (512) 480-8200

EmailProp2@texasrealtors.com

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