How a HELOC Works in Texas: Draw Periods, Repayment, and the 50% Rule

Texas homeowners have spent the last several years watching their equity grow. Between appreciation across DFW and the rest of the state, and the principal you have been paying down every month, there is a good chance your home is worth meaningfully more than what you owe on it.

A home equity line of credit, or HELOC, is one way to put that equity to work without selling and without touching the first mortgage you already have. But Texas is not like other states when it comes to home equity. Our state constitution puts real limits on how much you can borrow, how you can access the money, and even how the loan gets closed.

Understanding those rules ahead of time saves a lot of frustration. Here is how a Texas HELOC actually works.

A HELOC is a credit line, not a lump sum

A home equity loan hands you all the money at closing. A HELOC does not. It gives you an approved credit limit that you can draw against as you need it, pay back down, and draw against again.

That structure is what makes it useful for costs that arrive in stages rather than all at once: a renovation billed by phase, tuition paid by semester, or a reserve you want available without borrowing money you are not using yet. You pay interest only on the balance you have actually drawn, not on the full credit limit.

Most HELOCs are structured in two phases:

• The draw period. Commonly around ten years, though it varies by lender. During this stretch you can access funds up to your limit, and your required payment is typically small because it is calculated on your outstanding balance rather than the full line.

• The repayment period. Once the draw period closes, the line shuts off and you repay the remaining balance over a set term, often twenty years. Payments step up, sometimes considerably, because you are now amortizing principal.

One Texas-specific detail worth knowing: during the draw period, every scheduled payment on a Texas HELOC must at least cover the interest that has accrued. Your balance cannot quietly grow while you make minimum payments. That is a consumer protection written into our constitution, and it is a good one.

The 80% rule, and the 50% rule people miss

Texas caps total borrowing against a homestead at 80% of the home’s fair market value. That includes your first mortgage and every other lien on the property. If your home appraises at $500,000, all liens combined cannot exceed $400,000. Owe $300,000 on your first mortgage, and the most you can add is $100,000.

Then there is a second cap that catches almost everyone off guard, because it applies only to lines of credit and not to closed-end home equity loans. Under the Texas Constitution, no advance may be taken on a HELOC if the total outstanding principal after that advance would exceed 50% of the fair market value of the homestead as of the date the account was established.

Read that twice, because it does real work. On that same $500,000 home, outstanding principal cannot be pushed past $250,000 by a new draw. If your first mortgage alone is $300,000, you are already above the 50% line, and a HELOC will not be a workable tool for you no matter how much equity the 80% math suggests you have.

This single rule is the most common reason a Texas homeowner who looks like a fit for a HELOC turns out not to be one. It is also why a cash-out refinance or a closed-end home equity loan is sometimes the better structure, since those are governed by the 80% cap without the additional 50% advance limitation.

How you access the money, and how you don’t

Texas regulates the mechanics of drawing on a HELOC more tightly than most states:

• Every single draw must be at least $4,000. No small pulls for a plumbing bill.

• No credit card, debit card, or unrequested preprinted check can be used to access the line. Draws happen through your lender’s process, deliberately.

• No fee may be charged on any individual draw. Origination-type fees are collected once, when the line is established, and not again every time you use it.

• Your lender cannot unilaterally change the terms of the line after closing.

Closing a Texas HELOC takes longer than you expect

Texas home equity lending carries procedural requirements that add real time to the calendar. Plan for them rather than fighting them.

You will receive a required consumer notice, and the loan cannot close until the 12th day after you submit your application and receive that notice. There is a three-business-day right of rescission after closing, so funds are not available the moment you sign. Closing must take place at the office of the lender, a title company, or an attorney, not at your kitchen table. And closing documents must be prepared or reviewed by a Texas-licensed attorney.

Lender fees are capped in the aggregate at 2% of the principal amount, though appraisals, property surveys, title insurance premiums, and title examination reports sit outside that cap.

One more restriction: you may only have one home equity loan or line secured by your homestead at a time. If you already have a closed-end home equity loan in place, a HELOC is off the table until that one is resolved.

Is the interest deductible?

Sometimes, and it depends entirely on what you do with the money. Interest on a HELOC is generally treated as deductible only when the funds are used to buy, build, or substantially improve the home securing the loan, and only within the overall mortgage interest limits. Use the line to pay off credit cards or fund a vacation, and that interest generally is not deductible.

Tax treatment is case by case, so run your specific situation past your CPA before you count on a deduction.

Where to start

If you are trying to figure out whether a HELOC fits, the first useful step is honest math on your home’s value and your current lien balance. That tells you in about five minutes whether the 50% rule leaves you room to work, and whether a line of credit, a home equity loan, or a cash-out refinance is the right conversation to have.

We work through Texas home equity rules every week and can walk you through the numbers on your own property, with no obligation attached. Reach out and we will tell you straight whether the structure works for what you are trying to accomplish.