HELOC vs Cash Out Refinance in Texas: Which Option Is Right for Your Home Equity?

If you’re a Texas homeowner sitting on built-up equity, you’re probably wondering how to put that value to work. Whether you’re planning a major home renovation, consolidating debt, or covering education expenses, several options stand out: a first lien Home equity loan, a second lien Home Equity Loan, a Home Equity Line of Credit (HELOC) and a cash out refinance. With all these options you can access your home equity in Texas, but they work very differently.

Understanding these differences is especially important in the Lone Star State, where Texas home equity lending follows stricter rules than most other states. At Texaslending, we help homeowners navigate these unique regulations every day. This guide breaks down everything you need to know to make the right choice for your financial situation.

Understanding Home Equity Loans in Texas

Before diving into the comparison, it’s worth understanding what makes Texas unique. The state has some of the most protective home equity laws in the nation, designed to prevent homeowners from over-leveraging their properties.

Key Texas Home Equity Rules

Texas law caps your borrowing at 80% of your home’s appraised value, which means you must keep at least 20% equity in your home at all times. This applies whether you choose a Texas home equity loan, a HELOC or a Texas home refinance. Other important regulations under Section 50(a)(6) of the Texas Constitution include:

• 2% fee cap: Lender fees are capped at 2% of the loan principal, though third-party costs like title insurance, appraisal fees, survey fees, and discount points are excluded from this calculation

• 12-day waiting period: Your loan cannot close until at least 12 days after you submit your application and receive the required disclosure

• In-person closing required: Closings must occur at a lender’s office, attorney’s office, or title company—not at your home. The borrower must be physically present

• 12-month seasoning requirement: You must wait at least 12 months between cash-out transactions, even if you’ve paid off the previous loan. The 12 day requirement does not apply to home equity loans associated with rental properties.

• 3-day right of rescission: You can cancel without penalty within three calendar days after closing, and funds won’t be disbursed until this period passes

• One equity loan at a time: You can only have one home equity loan or HELOC secured by your property at any given time

• Non-recourse protection: Lenders cannot pursue personal liability unless you obtained the loan through fraud

• Conventional loans only: Texas prohibits FHA and VA cash-out refinances—only conventional loans qualify

For HELOCs specifically, Texas requires a minimum draw of $4,000 for each advance.

These protections may feel restrictive, but they’ve helped Texas homeowners avoid the over-borrowing problems that devastated other states during the 2008 housing crisis.

What is a Home Equity Loan?

Home equity loans in Texas may be done on 1st or 2nd liens.  A standard 1st lien home equity loan would typically be done on a home that is already paid off. Any money you take out of equity would be refinanced on a fixed rate loan in one lump sum of cash. You may use this loan for many purposes including consolidating credit card debt to lower payments, school tuition etc.  These loan typically have a lower rate than a HELOC.

A 2nd lien home equity loan is a fixed rate loan that is usually chosed when a borrower already has a very low rate 1st lien loan they aquired on a home purchase loan or previous refinance. One major benefit of the 2nd lien home equity loan is the use of automated appraisals for a vast majority of these loans, resulting in lower costs and faster closing times.  These loans usually have similar rates to a HELOC and may be used on primary residences as well as 2nd homes, and investment properties

What Is a HELOC?

A Home Equity Line of Credit works like a credit card secured by your home. You’re approved for a maximum credit limit based on your available equity, and you can borrow against that line as needed during a draw period (typically 10-15 years).

How HELOCs Work in Texas

During the draw period, you only pay interest on what you actually borrow—not the full credit limit. Once the draw period ends, you enter a repayment period (usually 10-20 years) where you pay back both principal and interest.

Current HELOC rates in Texas average around 7.6% to 8.5% as of early 2026, though rates vary based on your credit score and lender. These rates are variable, meaning they can fluctuate with market conditions.

Advantages of a HELOC

• Flexibility: Borrow only what you need, when you need it (minimum $4,000 per draw)

• Lower upfront costs: Closing costs are typically minimal or waived

• Keep your existing mortgage: Your current rate stays intact

• Interest-only payments: Lower monthly costs during the draw period

• Tax benefits: Interest may be deductible if funds are used for home improvements

Disadvantages of a HELOC

• Variable rates: Payments can increase if rates rise

• Requires discipline: Easy access to credit requires financial responsibility

• Second lien position: Creates additional debt obligation

• Repayment shock: Payments increase significantly after the draw period

What Is a Cash Out Refinance?

A cash out refinance Houston and Dallas homeowners often consider replaces your existing mortgage with a new, larger loan. You receive the difference between your new loan amount and your current mortgage balance as cash at closing.

How Texas Home Refinance Works

Let’s say you have a $300,000 home with a $180,000 mortgage balance. With Texas’s 80% LTV rule, you could potentially refinance up to $240,000. After paying off your existing loan, you’d receive approximately $60,000 in cash (minus closing costs).

Due to regulatory concerns cash out refinance loans are sligtly higher than a standard refinance loan.  Current Texas cash out refinance rates may be seen in t between 6.5% APR and 7.5% APR for most borrowers, depending on credit profile and loan type. Unlike HELOCs, cash-out refinances typically offer fixed rates, meaning your payment stays the same throughout the loan term.

Advantages of Cash Out Refinance

● Fixed interest rate: Predictable payments that won’t change

● Single monthly payment: Replaces existing mortgage, no second lien

● Potentially lower rates: Often lower than HELOC rates

● Large lump sum: Ideal for major one-time expenses

● Possible rate improvement: Could lower your overall mortgage rate

● May be refinanced later: After 12 months by re refinanced to a standard refinance loan.

Disadvantages of Cash Out Refinance

• Potentially Higher closing costs: Typically 2-5% of the loan amount

• Longer closing timeline: Usually takes 20-45 days

• Replaces your current mortgage: Best if Your Cash Out Refinance has a rate similar to your existing mortgage rate.

• May extend your loan term: May restart your 30-year clock. You might consider a shorter term if you chose.

• Conventional loans only: Texas prohibits FHA and VA cash-out refinances

Comparing Dallas Refinance Rates and HELOC Options

When deciding between these options, consider how current market conditions affect your choice. Use a mortgage calculator Texas tool to run the numbers for your specific situation.

When a Fixed rate 2nd Lien Home Equity Loan or HELOC Makes More Sense

A 2nd lien home equity loan or HELOC is typically the better choice when:

• Your existing mortgage rate is below current market rates (under 5%)

• You need flexible access to funds over time(HELOC)

• Your project costs are unpredictable (phased renovations)

• You want to keep your current mortgage terms intact

• You’re comfortable with variable-rate risk (HELOC)

When a first lien Home Equity Loan or Cash Out Refinance Makes More Sense

Consider a cash-out refinance when:

• Your current mortgage rate is higher than today’s rates

• You need a large, one-time sum of money

• You prefer the stability of fixed payments

• You’re consolidating high-interest debt

• You plan to stay in your home long-term

Finding the Right Home Lenders Texas Residents Trust

Working with experienced home lenders Texas homeowners rely on makes a significant difference. The best lenders understand the state’s unique regulations and can guide you through compliance requirements.

Texaslending specializes in helping Texas homeowners access their equity while navigating state-specific rules. Our team can help you compare Texaslending rates against other options and find the most cost-effective solution for your needs.

What to Look for in a Lender

• Experience with Texas Section 50(a)(6) home equity regulations

• Transparent fee disclosure within the 2% cap

• Competitive home refinance rates in Texas

• Strong customer service reputation

• Clear explanation of the 80% LTV rule and waiting period requirements

Special Considerations for Home Equity Loan Dallas Texas Residents

The Dallas-Fort Worth market has unique characteristics that affect your decision. With inventory at a 12-year high and home prices experiencing mixed performance, understanding your current equity position is crucial before applying for either product.

Refinance rates Dallas homeowners see today remain competitive despite market uncertainty. If you purchased during the 2023 peak when rates approached 8%, a cash-out refinance could potentially lower your rate while accessing equity.

Making Your Decision: A Practical Framework

To determine the right choice, ask yourself these questions:

1. What’s your current mortgage rate? If it’s below 5%, a 2nd lien Home Equity Loan or a HELOC likely makes more sense.

2. How much do you need? Large, one-time needs favor cash-out refinancing.

3. When do you need the funds? Home equity loans, cash out refinances and HELOC options require a 12-day waiting period in Texas, but 2nd lien fixed home equity loans and HELOCs typically close faster overall (2-4 weeks vs. 20-45 days).

4. How will you use the money? Phased projects work better with HELOCs (remember the $4,000 minimum draw).

5. How long will you stay in the home? Longer stays favor fixed rate home equity loans or cash-out refinancing to recoup closing costs.