Texas was one of the last states to allow homeowners to take out home equity loans. Laws going back to the nineteenth century strictly prohibited home equity lending, as legislators feared that unscrupulous lenders would take advantage of homeowners for the purpose of seizing their homes through foreclosure. This made it impossible for citizens of the Lone Star State to use their equity for home improvements, debt consolidation or paying medical bills, as homeowners in other states may do.



In 1997, the Texas constitution was amended to allow homeowners to borrow against their home equity. The amendment allowed for traditional term loans, lines of credit, and reverse mortgages, but did not allow a line of credit on a reverse mortgage.

In a reverse mortgage, owners of homes who are at least 62 years of age may borrow against the equity in their home. They need not pay the money back until they die, move or sell the home. Reverse mortgages have become quite popular in the last few years, especially in areas like California, where homeowners may be cash poor but may have a lot of equity in their homes. Nationally, nearly 90% of homeowners who take out a reverse mortgage do so with a line of credit. In Texas, however, the only options are a lump sum or monthly payments. There are several advantages in taking a reverse mortgage in the form of a line of credit, rather than a lump sum. The most significant is the fact that interest is only due when money is actually drawn from the credit line. This saves the homeowner substantial amounts of interest over the life of the loan when compared to a lump-sum payout. Reverse mortgages have been quite popular in Texas since the law was changed to allow them, but lenders say that the demand should increase substantially if lines of credit are allowed.

The Texas Legislature has recently approved a constitutional amendment that will allow lines of credit.for reverse mortgages, and this amendment is expected to be on the ballot in Texas this fall. This bill is expected to pass easily, and once it does, Texas may become the leading state in the country for issuing reverse mortgages.