HOME EQUITY
QUESTIONS AND ANSWERS
Q. What is an equity loan?
A. An equity loan is secured by the
equity you have in your homestead. Your "equity" is
the value of your homestead minus any outstanding debt already
secured by your homestead.
Example: $100,000 = Value of your homestead
$ 60,000 = Mortgage (loan to purchase home)
$ 40,000 = Equity in your homestead
Q. How could I use an equity loan?
A. You could use the money for any purpose. Such as sending
a child to college, paying medical expenses not covered by insurance
or starting/expanding your own business. The equity you have in
your homestead is your money.
Q. Can lenders in Texas make equity loans?
A. No. Texas law prohibits equity loans. Texas is the only
state in the country where the government will not let their citizens
use their property as they see fit. your equity belongs to you.
You worked hard to earn the money and should be able to use it
to improve the quality of your life.
Q. Is there a limit on the amount a homeowner can borrow?
A. Yes. All loans against a homestead are limited to 80% of
the market value of the property. For example, if a home is worth
$100,000 and the balance of the homeowner's mortgage is $70,000,
the homeowner would be able to borrow up to $10,000 under an equity
loan ($70,000 + $10,000 = $80,000 which is 80% of a $100,000 home).
Q. Are there special benefits for senior citizens?
A. Yes. A particular attractive option to house-rich but cash-poor
elderly homeowners is a type of equity loan called a reverse mortgage.
A reverse mortgage allows you to convert some of your equity into
spendable cash and keep ownership of your home.
Q. What is a reverse mortgage?
A. A reverse mortgage (RM) is a method for helping house-rich,
cash-poor senior citizens unlock their equity and convert it into
income without having to sell their homes. Unlike an equity loan,
which requires a borrower to make monthly payments, a reverse
mortgage borrower receives payments from a lender.
Because borrowers do not make monthly payments, they cannot default
on an RM. Foreclosures are impossible-by definition, they are
strictly prohibited.
Under a RM, no repayment is due until the owner either sell their
home or pass away. If the owners sell the home, the RM is repaid
from the proceeds of the sale. The balance of the money from the
sale belongs to the owners who sold the home. If the last of the
owners passes away (surviving spouses remain in the home until
they move or pass away), the heirs have two options. First, they
can sell the home, repay the RM and keep the excess sales proceeds.
Or, the heirs can refinance the RM by obtaining a 15 or 30 year
mortgage and then live in the home.
Q. Will the payments received by a senior citizen homeowner
from a lender under a reverse mortgage affect the senior citizen's
eligibility for benefits?
A. Reverse mortgage payments received by a homeowner will
not affect Social Security or Medicare eligibility because
these programs are not based on need. Social Security benefits
are earned by a person's period of covered employment and Medicare
is available to anyone age 65 or older, or to anyone under 65
who receives Social Security disability benefits.
If a person receives Supplemental Security Income (SSI) or Medicaid
benefits, both of which are based on need, these benefits may
be affected by reverse mortgage payments. Eligibility for SSI
is based on income and the amount of assets owned by an individual.
As long as reverse mortgage payments are spent in the month
they are received, they will not affect SSI benefits. Proceeds
of a loan cannot be counted as income. However, if reverse mortgage
payments are not spent in the month they are received, they will
accumulate and may be counted by the SSI program as "liquid
assets", thus potentially decreasing or eliminating benefits.
This is also the case for Medicaid benefits. This is one
reason financial counseling for seniors, which is required by
legislation, is so important.
Q. Will home equity reform reduce or eliminate homestead tax exemptions?
What about additional exemptions for senior homeowners?
A. No. Home equity reform will have no affect on homestead
tax exemptions for homeowners or senior homeowners. Homestead
tax exemptions are tax laws. Home equity loans will be authorized
by the Texas Constitution. These two sets of laws are completely
separate. A change in one does not have any affect on the other
Q. What does the homestead law do?
A. The homestead law protects you from losing your home in
certain cases. If you miss a payment on a credit card, your home
is protected from that creditor. Even if someone sues you and
wins, they cannot foreclose on your home to pay the judgment if
you don't have enough money to pay it.
Q. Why is the homestead law so misunderstood?
A. That's a good question. Many Texans think the homestead
law protects them from losing their home for any reason.
This belief makes people feel safe, but it's not true.
Q. Can I lose my home, even with the homestead law?
A. Yes. There are five types of debt valid for placing a lien
against a homestead; a loan to buy your house, a home improvement
loan, a loan to pay property taxes, a loan to pay off a federal
tax lien and a loan (owelty of partition) ordered by a court in
a divorce or inheritance. In Texas, you cannot use your home as
collateral for any other loan or debt.
A debt is valid against your home when you pledge your home as
collateral for a loan. If you don't repay one of these five types
of loans, the lender can foreclose, sell your house and use the
proceeds to repay the loan. Remember, the Texas homestead law
protects your home from creditors for all debts except for the
five types mentioned above.
Q. If the Texas Constitution is amended to allow home equity
borrowing, what about future legislation?
A. Legislation must be passed by a two-thirds vote of both
the Senate and the House of Representatives and then placed on
the statewide ballot and approved by Texas voters, to amend the
state constitution.
Home equity reform requires an amendment to the Texas Constitution.
Once that process is completed, the Texas Legislature will not
be able to remove or restrict the ability to borrow against home
equity without presenting the new legislation to the voters for
approval.
Q. If I still have questions, who can I call?
A. Call the Texas Conference for Homeowners' Rights at (512)
432-1757, State Senator Jerry Patterson at (512) 463-0111 or State
Representative Debra Danburg at (512) 463-0504.
THOMAS LAW FIRM, P.C.
6116 NORTH CENTRAL EXPRESSWAY
SUITE 922, L.B.72
DALLAS, TEXAS 75206-5155
214.692.7611 (VOICE) OR 692-7613 (FAX)
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