Q: We refinanced and took money out of our home in 2005 with a Texas home equity loan at 7.5 percent. Whenever I ask about refinancing with any one of numerous mortgage companies, I am told that any refinance would have to be a Texas home equity loan and the interest rate would be higher than the lower rates advertised for mortgages.
I talked to a representative from a big box lender and she called it a consumer loan and told me that if we tried to pay money toward the principal, it would not shorten the term. The payment would only be reduced. I paid $1,000 toward the principal and for the next 3 months our payments went only to interest.
Please help me understand this and to change it in any way I can. We still have 15 years on a 2-year note and we owe about $100,000 owed. I hate this situation.
A: When you refinanced back in 2005, you took out a home equity loan rather than obtain a traditional mortgage. It may have been that it was easier for you to obtain the Texas home equity loan at that time.
But in any case, it appears that Texas has quite a number of specific rules relating to how and when you can take out a home equity loan. The maximum amount you can take out under a Texas home equity loan is 80 percent of the home’s value.
You may have taken less than 80 percent when you refinanced in 2005 and the key for you now is to find out what the rules might be for you to refinance out of the Texas home equity loan into a traditional mortgage.
It may be that your loan balance has to go down by a certain percent before you qualify to refinance your equity loan. You may also need quite a bit of equity (the difference between what you owe and what your home is worth) in your home.
If the ratio of the loan amount and your home value is low, you should be able to find a lender to assist you. However, if your loan value is quite high relative to your home’s value, you might have to offer to pay down some of the debt in order to refinance the loan into a traditional mortgage at today’s low rates.
What the big box lender was telling you was that you might be able to get a mortgage with them if you came up with cash to refinance. If you owe $100,000 on your Texas home equity loan, you might have to pay $20,000 to get an $80,000 mortgage. The numbers will depend on what you owe on your equity loan, the value of the home and the amount you want for a new loan.
Talk to a lender you trust. If you trust the person at the big box lender, talk to that person again and ask more questions so that you understand what the lender will require to approve a new primary loan for your home.
If you refinanced in 2005 when your home value had gone up substantially, but now your home’s value has gone down, you need to understand what that means for you. What it might mean is that you can’t refinance out of the loan you have.
From what we can tell from your letter, the information you’ve received about your Texas home equity loan appears to be accurate. Equity loans are frequently treated differently than mortgage loans. In particular, the manner in which interest is processed in an equity loan can be different than with a mortgage. Texas has had stringent lending rules, which has allowed it to escape some of the damage caused by the recent housing crisis.
But, we haven’t looked at your documents, so we can’t know for sure. But if you have questions about the legality of your loan or need someone to explain what your documents mean and what limitations you face with regard to refinancing your loan, please consult with a real estate attorney or trusted mortgage loan officer.