Matt Webber is an experienced personal finance writer, researcher, and editor. He has published widely on personal finance, marketing, and the impact of technology on contemporary arts and culture.
Updated October 23, 2023 Fact checked by Fact checked by Vikki VelasquezVikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.
A home equity loan is a new loan taken out against the equity a homeowner has built up in their home by paying down their mortgage over time. The size of the loan is determined by the difference in the market value of the home and the remaining balance on the mortgage.
Because home equity loans require mortgage holders to put their house at risk if they default on the loan, these loan types are relatively tightly regulated. A number of laws control how home equity loans are advertised, sold, and managed. Some of these are federal and some operate at the state level.
Every state in the United States has laws that apply to home equity loans in some way, and some states have gone much further than the federal government in seeking to control and limit these loans.
In this article, we’ll explain why states have sought to regulate home equity loans, the kind of rules they’ve put in place, and then look at a specific example: Texas.
While home equity loans allow homeowners to access the capital in their homes, they can be risky endeavors. The reason is that they require your house to act as collateral against the loan. If you default on your loan, the lender can cease your home and sell it to recuperate their loss.
Because of this risk, and the risk that borrowers may end up in a cycle of never-ending debt by taking out loans to pay off existing debt, and then spending even more, home equity loans are heavily regulated.
All states have home equity loan laws. Because these laws are constantly changing, borrowers can access updated information in the annual publication, "Pratt’s State Regulation of Second Mortgages and Home Equity Loans."
As this book states, state laws on home equity loans apply to almost every aspect of these loans. There are state-level laws that apply to second mortgages in all of these categories:
It’s important that lenders are aware of these rules and follow them. For borrowers, they are only likely to become relevant if you think that you have been mis-sold a home equity loan. However, it’s best to consult an attorney in this case, because state rules on what lenders can and can’t do are constantly changing.
Mortgage lending discrimination is illegal across the U.S. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).
An instructive example of just how detailed state laws can be when it comes to home equity loans is Texas. The state was the last in the U.S. to allow home equity loans—they became legal in 1997—and they are regulated under a Texas Constitution statute known as Section 50. This section of the constitution protects consumers from predatory lenders by dictating strict provisions under which lenders must operate, with serious penalties for non-adherence.
Section 50 regulates many aspects of how home equity loans work in Texas. It sets a state limit on the maximum amount that homeowners can borrow, limits them to one loan, and requires that their lender perform a detailed process of due diligence to make sure that the loan is responsible.
There are also strict laws related to how home equity loans can be sold and advertised, and how their terms are explained to borrowers. These terms are also outlined in the Texas Home Equity Early Disclosure document, which must be given to borrowers who take out a home equity loan in the state.
Though Texas’ laws on home equity loans are unusually strict, the state is not unusual in having these laws. If you are considering a home equity loan, it’s worth researching the laws in place in your home state. In most cases, these are designed to protect borrowers against taking out loans that they will find difficult to pay back.
Getting a home equity loan means that you've obtained a new loan based on the equity that you've built up in your home over time by paying down your mortgage. The value of this new loan will be equal to the difference between the market value of your home and the remaining balance on your mortgage. A home equity loan exchanges the equity in your home for cash, which can be used for a variety of purposes; most often for home renovations.
The cheapest way to get equity out of your house is typically through a home equity line of credit (HELOC). This type of loan allows you to borrow against the equity in your house and you don't have to spend the entire amount, only what you need. And you only pay interest on the amount you've actually utilized, kind of like a credit card.
Yes, you can lose equity in your home. The equity in your home is the current market value of your home minus the outstanding balance on your mortgage. If your home drops in value, then the equity in your home will decrease.
Home equity loans can be unsuitable for some borrowers because they come with the risk of losing your house. There are many federal and state-level laws that apply to home equity loans. These cover many aspects of how these loans are advertised, sold, and managed, and state regulations in this area are constantly changing.
If you think you’ve been mis-sold a home equity loan, you should first contact the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD). If you think a lender has acted against the laws in your state, contact your state regulator or a local attorney.