HELOC vs. Cash-Out Refinance in Texas: Which Is Better?

HELOC vs. cash-out refinance: comparison table

This table compares the two products for a Texas homestead. The legal limits apply to every lender. The Herring column lists only terms published on herringbank.com.

How a HELOC works in Texas

A home equity line of credit is a revolving line secured by your home. During the draw period you borrow, repay and borrow again. When the draw period ends, the remaining balance converts to regular principal-and-interest payments. The CFPB’s HELOC brochure explains the general mechanics. Texas then adds rules that don’t exist in most states.

Texas HELOC rules under Section 50(t)

• $4,000 minimum per advance. Each draw must be at least $4,000.
• No cards or convenience checks. You can’t use a credit card, debit card or unsolicited preprinted check to draw.
• Fees only at opening. Fees are collected when the line is set up. No fee can be charged on an individual draw.
• No one-sided changes. The lender can’t change the terms on its own.
• Payment rules. During the draw period, each payment must cover at least the interest that has accrued. After the draw period, payments must be substantially equal.

Herring Bank’s Texas HELOC terms

According to the Herring Bank Texas home equity loans page, the HELOC is available in Texas only, on owner-occupied single-family or PUD primary residences. Terms include:

• Minimum FICO score of 660 and maximum DTI of 40%
• Up to 75% combined loan-to-value
• Variable rate based on WSJ Prime plus a margin
• An interest-only draw period, then a fully amortizing repayment period (your loan officer will confirm current terms)
• Lines from $25,000 to $150,000, with a $4,000 minimum draw
• Origination fee of 2% on lines of $50,000 or less and 1% on lines over $50,000
• Full appraisal required, with the fee paid before the appraisal is ordered
• No prepayment penalty

Herring’s page puts the typical time from application to funding at about two weeks, including the 12-day notice period and the 3-day right of rescission. Our Texas HELOC guide covers qualifying in more detail.

How a Texas cash-out refinance works

A cash-out refinance replaces your current mortgage with a new, larger loan, and you receive the difference in cash. If you take any cash out against a Texas homestead, the whole new loan becomes a Section 50(a)(6) home equity loan, often called a “Texas cash-out” or “A6” loan. That status brings the same protections as a HELOC:

• 80% cap. The new loan plus any other liens can’t exceed 80% of fair market value.
• 12-day wait. Closing can’t happen until 12 days after the later of your application or your receipt of the required Texas home equity notice.
• Approved closing locations. The loan must close at the lender’s office, an attorney’s office or a title company.
• One per year. Only one 50(a)(6) loan can close on the same homestead in any 12-month period.
• Non-recourse. You aren’t personally liable beyond the home, unless there was actual fraud.
• Court order required. The lender can foreclose only through a court order.

Program rules apply on top of Texas law. Fannie Mae requires the first mortgage being paid off to be at least 12 months old and at least one borrower to have been on title for six months (Selling Guide B2-1.3-03). FHA cash-out loans max out at 80% LTV and require 12 months of owner occupancy (HUD Handbook 4000.1). Herring’s cash-out refinance page lists a minimum credit score of 620 as the general benchmark.

One long-term consequence often gets overlooked. Because a Texas cash-out loan is a home equity loan, any later refinance without cash has to meet the Section 50(f)(2) conditions to become a regular mortgage. Those conditions include waiting at least one year. Our guide to the rate-and-term refinance and the 50(f)(2) conversion explains the steps. For a fuller look at the trade-offs, see the pros and cons of a Texas cash-out refinance.

Costs: closing costs, the 2% fee cap and rate type

Section 50(a)(6)(E) of the Texas Constitution limits the fees needed to originate, evaluate, maintain, record, insure or service a home equity loan to 2% of the original principal. Interest and bona fide discount points are separate and don’t count. Four items are excluded from the cap:

• A third-party appraisal
• A survey by a state-registered or licensed surveyor
• The state base premium for the mortgagee title policy, with endorsements
• A title examination report, if it costs less than the state premium for a standard title policy

The cap works the same way for both products, but the dollar amounts don’t. On a $50,000 HELOC, 2% is $1,000. On a $303,000 cash-out refinance, 2% is $6,060, and the excluded costs (such as title on a larger policy, plus prepaid interest and escrow) come on top. You’ll see every fee on your Loan Estimate. Our article on how much it costs to refinance in Texas breaks down each line.

Rate type matters as well. A HELOC rate moves with the prime rate, which was 7.00% in the Federal Reserve’s October 15, 2026 H.15 release. If prime rises 1 percentage point, the interest on a $50,000 balance rises by about $42 a month. A fixed-rate cash-out loan locks your payment, but it locks it on the entire balance.

Worked example: $400,000 home in Fort Worth

Maria owns a $400,000 home in Fort Worth. In 2021 she took out a $280,000, 30-year mortgage at 3.25%, with a principal-and-interest payment of $1,219. Her balance is now about $247,000. She needs $50,000 for a roof, HVAC and a kitchen remodel.

• Texas 80% cap: $400,000 × 80% = $320,000 in total liens. $320,000 − $247,000 = $73,000 available.
• Herring’s 75% HELOC limit: $300,000 − $247,000 = $53,000 available, so a $50,000 line fits.

Option A saves about $525 a month and roughly $51,000 in interest over five years. The trade-off is rate risk on the $50,000, plus a jump in payment when the draw period ends. At 8.50%, a $50,000 balance amortized over a 10-year repayment period would cost about $620 a month. You can run your own numbers with Herring’s refinance calculator. Property taxes and insurance are the same under both options, so they’re left out of the comparison.

When a HELOC wins (keeping a low first-mortgage rate)

• Your first mortgage rate is well below market. Refinancing a 3% or 4% loan into a 7% loan to borrow a fraction of the balance usually costs more than a higher-rate HELOC on the new money alone.
• You need money in stages. A remodel paid over several months, or tuition paid each semester, fits a line you draw from. You pay interest only on what you’ve drawn.
• You plan to repay quickly. A HELOC has no prepayment penalty, so a bonus, a tax refund or a home sale can pay it down without the sunk cost of refinancing a whole first mortgage.
• You want lower upfront costs. Fees are figured on a $25,000 to $150,000 line, not on a $300,000-plus loan.

When a cash-out refinance wins

• Your current rate is at or above market. If you locked near the 2023 peak, refinancing can lower your rate and free up cash in a single transaction.
• You need more than a HELOC allows. Herring’s HELOC tops out at $150,000. A cash-out refinance can reach the full 80% Texas limit, subject to program and loan limits.
• You want a fixed rate on everything. If a variable payment would keep you up at night, one fixed payment is easier to budget.
• Your credit score is between 620 and 659. Herring’s HELOC requires a 660 FICO. Cash-out refinance programs start at 620 for conventional loans, and FHA can go lower. See credit score requirements for a Texas cash-out refinance.
• The home isn’t a single-family home or PUD. Herring’s HELOC excludes condos and manufactured homes. A cash-out refinance program may accept them.

Where a home equity loan fits

A fixed-rate home equity loan sits between the two. Like a HELOC, it leaves your first mortgage alone. Like a cash-out refinance, it pays you a lump sum with level payments, usually at a fixed rate, though some banks reset the rate at set intervals. In Texas it’s also a Section 50(a)(6) loan with the same 80%, 2%, 12-day and one-per-year rules. It works well when you know the exact amount you need and want predictable payments without giving up a low first-mortgage rate. For example, a $50,000 home equity loan at an illustrative 8.50% over 15 years costs about $492 a month. Our explainer on what a home equity loan is compares it with a HELOC in detail.

Is the interest tax-deductible?

Under IRS Publication 936 (the edition for 2025 returns), interest on a home equity loan or line of credit is deductible only if the borrowed funds are used to buy, build or substantially improve the home that secures the loan. Your total qualifying mortgage debt is also limited to $750,000 ($375,000 if married filing separately) for debt taken out after December 15, 2017. The same test applies to the cash-out portion of a refinance. Money used for a new roof can qualify. Money used to pay off credit cards or buy a car doesn’t. You also need to itemize deductions to benefit. Talk with a tax professional about your situation.

Herring Bank NMLS #415783 | Member FDIC | Equal Housing Lender. This article is for educational purposes only and does not constitute financial, legal or tax advice. It is not a commitment to lend. Rates, payments and fees shown are examples, not offers. Loan programs, rates and eligibility requirements are subject to change without notice and subject to credit approval. Texas home equity rules are summarized as general information.