For many homebuyers, the idea of putting at least 20% down on a home has been ingrained as a sound financial strategy. The benefits are well-known: lower monthly payments, avoiding private mortgage insurance (PMI), and less interest paid over the life of the loan.
However, in Texas, this conventional wisdom could actually work AGAINST YOU—especially if you ever need to tap into your home equity for emergency funds.
The Texas 20% Home Equity Rule
Texas has some of the strictest home equity lending laws in the country. One of the most significant restrictions is the 80% loan-to-value (LTV) rule when it comes to getting a cash-out refinance.
Under Texas law, a homeowner can never have a total mortgage balance that exceeds 80% of their home’s current market value when using their home as collateral for a loan (such as a cash-out refinance or home equity loan).
While this rule is designed to prevent homeowners from over-leveraging their properties, it can create an unexpected financial roadblock—especially in a declining housing market, like we are seeing now.
The Risk of Overfunding Your Down Payment
If you put 20% or more down on your home at the time of purchase, you may assume that you are in a strong financial position. However, this decision could backfire if you later need to access that equity and home values drop. Here’s why:
No Access to Cash-Out Refinance: Since Texas law caps mortgage balances at 80% of the home’s value, if you start with a low mortgage balance (by putting 20% down) and your home value declines, you may have little or no ability to take out a home equity loan or cash-out refinance in the future.
Dropping Home Prices Could Trap Your Equity: If home values decline after you buy, your ability to borrow against your home could shrink even further. For example, if you put 20% down on a $400,000 home (an $80,000 down payment), but the market drops by 10%, your home is now worth $360,000. Under Texas law, your maximum loan amount must remain at or below 80% of $360,000—which is just $288,000. If your original loan balance was already at $320,000 or lower, you wouldn't be able to access any equity at all.
Emergency Funds Become Inaccessible: Many buyers assume they can always use their home’s equity as a backup plan for emergencies. But in Texas, overfunding your down payment can make that impossible. Instead of keeping liquidity for unexpected costs—such as medical bills, job loss, or major home repairs—you may find yourself house-rich but cash-poor.
A Better Strategy: Smaller Down Payment, More Cash Reserves
Instead of putting a full 20% or more down, consider a more strategic approach:
1. Keep Your Down Payment LOWER – This allows you to maintain some financial flexibility while still building equity. While this may mean paying PMI for now, it keeps more of your cash available for emergencies.
2. Keep Extra Cash in Savings or Other Investments – Rather than locking all your money into home equity that you may not be able to access, having liquid cash reserves ensures you’re financially secure if an emergency arises.
3. Consider Market Conditions – If home values are unstable or declining, preserving cash might be more valuable than avoiding PMI. If you’re in a strong housing market, a larger down payment could make sense, but in Texas, you need to consider the long-term impact of the state’s strict home equity laws.
Here's What You Should Consider...
Consider having an appraisal of your home every couple of years to get an accurate look at the real estate market your home’s value.
While a 20% down payment has long been seen as a benchmark for financial responsibility, Texas homeowners need to be aware of the unintended consequences of overfunding their mortgage. Due to the state's 80% LTV restriction on home equity loans, putting too much money into your home upfront could leave you without financial flexibility when you need it most.
Before committing to a large down payment, consider your long-term financial security and ensure you have enough accessible cash for life's unexpected turns.
These days with the economic uncertainty all around us keeping more cash in your pocket is the smarter move—especially in Texas.
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