Cash-Out Refinance vs. HELOC: Tapping Your Texas Home Equity

If you have built up equity in your Texas home, you may be able to tap into it for renovations, debt consolidation, or other major expenses. Two of the most common ways to do this are a cash-out refinance and a home equity line of credit (HELOC). They work differently, and Texas has some of the strictest home equity rules in the country, so it is important to understand your options before you borrow.

A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. You end up with a single new loan, a single payment, and a new interest rate. A HELOC, by contrast, is a revolving line of credit that sits behind your primary mortgage. You draw from it as needed during a set period and pay interest only on what you use, much like a credit card secured by your home.

What makes Texas different is the state constitution. Home equity lending in Texas is governed by Article XVI, Section 50(a)(6), which sets unique borrower protections that do not exist in most other states. The most important limitation is the equity cap: under these rules, the total of all loans against your homestead generally cannot exceed 80 percent of the home’s fair market value. That means you must keep at least 20 percent equity in the home, even after borrowing, which limits how much cash you can pull out compared to buyers in other states.

Texas 50(a)(6) loans also come with other built-in safeguards. There are limits on certain fees, a required waiting period before closing, restrictions on how often you can refinance an equity loan, and rules that the loan must be closed at an office of the lender, an attorney, or a title company. Once a loan is designated a Texas home equity loan under 50(a)(6), those protections follow the loan, which can affect future refinancing options as well.

These rules apply to home equity products including Texas HELOCs and home equity loans, and they exist to protect homeowners from over-leveraging their primary residence. While they can feel restrictive, they also provide meaningful consumer protection. Deciding between a cash-out refinance and a HELOC depends on your current rate, how much equity you have, and how you plan to use the funds. Our team understands the Texas equity rules in detail and can help you compare your options and stay within the 50(a)(6) limits.