What Is Home Equity in Texas? Understanding Its Value, Benefits, and Legal Framework

Home equity is one of the most misunderstood financial assets, yet it holds significant value—especially for homeowners in Texas. At its core, home equity represents the difference between what your home is worth and what you still owe on your mortgage. But in Texas, accessing and leveraging that equity comes with unique legal considerations that set it apart from other states.

At Herring Bank, we help Texans make smarter decisions about their mortgage, whether you’re preparing to buy your first home, refinance an existing loan, or explore ways to use your home equity effectively. In this article, we’ll walk through the essentials: what home equity is, why it matters, how it works under Texas law, and how you can put it to use.

What Exactly Is Home Equity?

Home equity is the portion of your home that you truly own. It’s calculated by subtracting your outstanding mortgage balance from your home’s current market value.

Formula:

Home Equity = Home Value – Mortgage Balance

Let’s say your home is valued at $400,000 and you owe $280,000 on your mortgage. That leaves you with $120,000 in equity. This figure increases over time as you make mortgage payments and as your home appreciates in value.

For most homeowners, equity builds slowly but steadily. And with the right guidance, it can become a critical asset to support your broader financial goals.

Why Home Equity Matters—Especially in Texas

As you gain equity, you gain access to one of the lowest-cost sources of capital available. Many homeowners use equity for home improvements, education costs, debt consolidation, or even to fund small business ventures.

However, Texas adds a unique layer of protection to home equity through the state constitution. These provisions are designed to prevent homeowners from over-leveraging their property, ensuring long-term financial stability and homeownership security.

The benefits of building equity go beyond immediate borrowing power:

• Increased Net Worth: Your equity contributes directly to your financial foundation.

• Greater Financial Flexibility: You can convert equity into cash through refinancing or home equity loans.

• Lower Borrowing Costs: Compared to credit cards or personal loans, home equity borrowing typically comes with much lower interest rates.

How to Build Home Equity Over Time

There are several ways you can increase your home equity, some of which are proactive and others passive:

1. Making Additional Mortgage Payments

Every dollar you pay beyond your minimum mortgage payment reduces your principal—accelerating equity growth.

2. Home Improvements

Strategic upgrades (such as kitchen remodels or energy-efficient systems) can enhance your home’s market value and boost your equity.

3. Market Appreciation

As property values rise in your area, your home’s value may increase—even if your mortgage balance stays the same.

Texas Home Equity Law: What Sets It Apart

Texas has some of the most homeowner-friendly home equity laws in the U.S. These rules aim to strike a balance between access and protection.

Here are the most important legal guidelines to keep in mind:

The 80% Loan-to-Value Rule

Texas law allows you to borrow against your equity only up to 80% of your home’s current appraised value, less any outstanding mortgage balance.

Example:

• Home Value: $350,000

• 80% of Value: $280,000

• Mortgage Balance: $200,000

• Maximum Borrowable Equity: $80,000

Additional Rules You Should Know

• Primary Residence Only: You must live in the home you’re borrowing against.

• One Equity Loan per Year: Texas limits you to one equity loan (or cash-out refinance) in a 12-month period.

• Mandatory Cooling-Off Period: After you apply, you must wait 12 days before closing on a home equity loan.

• Closing Requirements: All closings must take place at a title company, attorney’s office, or lender’s office.

• Fee Limitations: Lenders can’t charge more than 2% of the loan amount in fees (excluding appraisal, survey, and title insurance).

These legal provisions—established under Texas Constitution Section 50(a)(6)—exist to prevent homeowners from falling into cycles of unsustainable debt.

Exploring Your Options: Home Equity Loan vs. Cash-Out Refinance

Once you understand how much equity you have, the next step is to determine the best way to use it. In Texas, you typically have two main options:

🏡 Cash-Out Refinance

With a cash-out refinance, you replace your current mortgage with a new one—larger than your existing balance—and take the difference in cash. This can be a useful option if you also want to lock in a better interest rate.

💼 Home Equity Loan

This functions as a second mortgage. You keep your original loan and borrow a fixed amount against your equity, which is repaid separately. It can be a strong choice if your current mortgage rate is favorable and you don’t want to refinance your entire loan.

At Herring Bank, we help you evaluate both options based on your goals, current interest rates, and the amount of equity you’ve built.

Refinancing in Texas: Why Equity Plays a Central Role

If you’re considering refinancing your mortgage in Texas, your equity will directly affect your loan-to-value (LTV) ratio, which impacts both your eligibility and your interest rate. More equity often translates to lower rates and a broader range of loan options.

Whether you’re refinancing to lower your monthly payment or tap into your home’s value, our team works with you to navigate the process with confidence.

👉 Apply to refinance your mortgage
👉 Explore new home purchase options

Using Equity Responsibly

Equity is a valuable financial tool—but one that should be used thoughtfully. Because your home secures any loan tied to your equity, defaulting on that loan could put your property at risk.

We advise using equity to invest in long-term value: home upgrades, higher education, debt reduction, or business expansion. Avoid using it for short-term purchases or lifestyle upgrades that don’t generate return.

Before moving forward, take time to assess:

• How will this loan impact your monthly cash flow?

• Are you confident in your ability to repay it on time?

• Will the investment increase your home’s value or improve your financial health?

If you’re unsure, we’re here to help you model out scenarios and make informed decisions.

Partnering with Herring Bank: Built for Texans, Backed by Expertise

At Herring Bank, we’ve been serving Texas homeowners for over a century. We understand the local market and legal landscape—and we’re committed to helping you make the most of your mortgage.

Whether you’re building equity, refinancing, or planning your next purchase, our mortgage advisors bring experience, clarity, and a personalized approach to every conversation.

Ready to take the next step?

✅ Apply to Buy a Home 
✅ Apply to Refinance