HELOC or cash-out refinance in Texas: same rules, very different loans

The short answer

A HELOC generally keeps your first mortgage and lets you draw over time, while a cash-out refinance replaces your first mortgage with one new loan.

The usual question is which loan costs less. In Texas, a better first question is what happens to the mortgage you already have. That single difference drives most of the decision, because the state’s home equity rules apply to both options.

Here is how the two compare:

	HELOC	Cash-out refinance
Your first mortgage	Generally stays in place	Replaced by the new loan
How you get money	Advances as needed, within your line	Generally one amount at closing
Minimum advance	$4,000 per advance	Not applicable
Fees subject to the 2% cap	Charged only when the line is established	Charged on the new loan
80% limit	Counts your maximum line plus other homestead debt	Counts the new loan plus other homestead debt

Requirements vary by lender and program. As a broker, we compare several lenders to find the best fit.

The rules both must follow

On a Texas homestead, both options generally fall under Article XVI, Section 50(a)(6) of the Texas Constitution.

That means the main protections apply either way:

• The 80% limit — total homestead debt can’t exceed 80% of fair market value when the loan is made.
• The 12-day wait — closing can’t occur before the 12th day after the later of your application or the lender providing the required notice.
• The fee cap — fees covered by the rule are capped at 2% of the original principal, with listed exceptions.
• The closing location — closing must occur at the office of the lender, an attorney, or a title company.
• The right to cancel — you and your spouse can cancel after closing without penalty.
• No personal recourse — unless the loan was obtained by actual fraud, and foreclosure requires a court order.

We go through each in our Section 50(a)(6) guide, and our Texas home equity timeline shows how the waiting periods fit together.

When a HELOC tends to fit

A HELOC tends to fit when you want to keep your first mortgage and expect to borrow in stages.

The most common reason is simple: you like your existing first mortgage. A HELOC sits alongside it rather than replacing it, as long as that first mortgage is a permitted type of debt.

• Phased projects — a renovation with costs spread over several months
• Uncertain amounts — you don’t yet know exactly what you’ll need
• Larger planned draws — each advance must be at least $4,000

The tradeoffs are real. A HELOC adds a second payment, and many lines carry a variable rate, so your payment can change. Texas also requires periodic payments that at least cover accrued interest during the draw period, followed by substantially equal installments afterward.

The practical move — Before you commit, ask how the payment could change during the draw period and what it becomes when the draw period ends.

When a cash-out refinance tends to fit

A cash-out refinance tends to fit when you need one lump sum and replacing your first mortgage works for you.

With a cash-out refinance, you end up with one new loan and one payment. That simplicity can be appealing, especially if your current mortgage terms aren’t worth preserving.

The tradeoff sits on the other side of the same coin: the new terms apply to your whole balance, not only the cash you take out. Replacing a low-rate first mortgage to access a smaller amount of equity may cost more over time than it first appears. Compare the total cost, not only the cash you receive.

Three Texas details homeowners miss

The one-year rule, the single-loan rule, and the $4,000 minimum often decide the question before pricing does.

The one-year rule. A new Section 50(a)(6) loan generally can’t close before the first anniversary of an earlier one on the same homestead. If you took cash out recently, the option you want may not be available yet.

The single-loan rule. A Section 50(a)(6) loan must be the only debt on the homestead when it’s made, unless the other debt falls into certain permitted categories. A purchase-money mortgage can qualify. An existing home equity loan generally would have to be paid off as part of the new transaction.

The $4,000 minimum. Every HELOC advance must be at least $4,000, and you can’t use a card or an unsolicited preprinted check to get one. This line isn’t built for small purchases.

What happens later

Moving out of a Texas home equity loan later is possible, but you would give up important protections.

If your cash-out refinance or HELOC is a Section 50(a)(6) loan, a later refinance generally must either stay a home equity loan or meet the conditions in Section 50(f)(2). Those conditions include waiting a year, taking no new cash beyond refinancing the debt and actual costs and reserves, staying within the 80% limit, and receiving a required notice.

That notice spells out the tradeoff. A non-home-equity refinance loses court-ordered foreclosure and non-recourse protection. Those benefits are worth weighing against any improvement in terms.

Rental property is different

These homestead rules apply to your primary residence, so equity lending on rental property works differently.

Section 50(a)(6) protects the Texas homestead. A loan against an investment property isn’t governed by these same homestead rules, and it usually has different terms and pricing. If you want to pull equity from a rental to buy another property, look at our DSCR loans instead.

How to get started

A short review of your current mortgage, your home’s value, and your plans is usually enough to narrow this down.

Tell us your current mortgage balance and terms, your rough home value, how much you need, and when you need it. We’ll tell you how the 80% limit applies, whether the one-year rule affects you, and how the two options compare across the lenders we work with. Start on our HELOC page or our refinance page.