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 own 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. This amendment to the Texas Constitution would make important changes to the existing home equity rules to better allow Texans to access their increased equity for whatever reasons they choose — 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 loans, and by exempting from the calculation certain charges lenders necessarily incur in originating the loan. Under Texas law today, many Texans simply cannot obtain home equity loans even if they own their homes free and clear because lenders cannot make the loans profitably.
For loans under $100,000, the origination expenses often exceed the current fee limitation of 3 percent of the loan amount. Under Proposition 2, that fee limitation will be reduced to 2 percent. And because lenders will not have to count the largest third-party fees incurred in the transactions (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, particularly since the interest on such loans is often tax-deductible.
Second, Proposition 2 will allow Texans to refinance home equity loans as a regular refinance when no additional funds are being obtained by the borrowers. 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 higher interest rates than non-home equity loans. 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 future interest expenses.
Third, Proposition 2 removes an impediment to many rural Texans seeking home equity loans. Rural property owners often enjoy reduced property taxes if portions of their properties are subject to agricultural use. Unfortunately, under the current Texas Constitution, lenders are legally prohibited from making home equity loans on properties subject to agricultural tax exemptions. Rural homeowners are forced to choose between keeping their tax exemptions or obtaining home equity loans. Under the current law, homeowners desiring home equity loans are forced to remove their agricultural use tax exemptions, which can expose them to significant tax liability for the tax savings they have enjoyed in prior years — as well as in the future. Proposition 2 would allow Texans who own farm homesteads to obtain home equity loans without losing these important tax savings.
Finally, Proposition 2 would enable Texans who choose home equity lines of credit to obtain future draws up to 80 percent of the value of their properties, 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, but the future draws are limited to a total of 50 percent of such value. For example, if a home with no liens is worth $250,000, the borrower could obtain a line of credit and obtain $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 loan, so that the total balance of the loan could never exceed $125,000. Proposition 2 would provide Texans important flexibility based on their individual financial needs.
Proposition 2 would expand Texans’ choice and flexibility in leveraging their most important assets — their homes — while retaining the important homestead protections that Texas law currently affords. Vote yes on Proposition 2!