A HELOC and a closed-end second mortgage both let you borrow against your home's equity without replacing your first mortgage. A closed-end second, often called a home equity loan, pays you a lump sum at closing and is repaid on a set schedule. A home equity line of credit, or HELOC, gives you a credit limit you can draw on, repay and draw again during a draw period. In Texas, if either one puts cash in your hands on your homestead, it's a home equity loan under Article XVI, Section 50(a)(6) of the Texas Constitution, so the total of all loans against the home can't exceed 80 percent of its fair market value, and a list of other protections applies.
A first mortgage is the loan recorded first against the property, and it gets paid first if the home is sold or foreclosed. A second lien is recorded behind it. If the home is sold, the first lien is paid in full before the second gets anything. That position is why second liens are usually priced differently from first mortgages and why lenders care so much about how much total debt sits against the home.
There are two common forms:
Combined loan-to-value, or CLTV, adds the liens against the home and divides by its value. A home with a first mortgage and a second lien has a CLTV equal to both balances divided by the value. Programs, lenders and Texas law all set limits, and a second lien has to fit under them.
A HELOC adds a wrinkle. Fannie Mae, for example, uses a separate ratio called HCLTV that counts the full amount of any HELOC, whether or not funds have been drawn, when a first mortgage it buys has a HELOC behind it. It also requires the lender to consider all subordinate liens on the property when calculating CLTV and HCLTV (Selling Guide B2-1.2-03, B2-1.2-04). An owner with a large, mostly unused line may be surprised when a lender counts the whole line during a later refinance of the first mortgage.
An unused HELOC is still a recorded lien. Until it's paid, closed and released, it sits on title, and the title company will ask about it on any sale or refinance.
A second-lien lender underwrites the borrower and the property much like a first-mortgage lender:
For a HELOC, the lender also decides how to qualify the payment. During the draw period, many lines require interest-only payments. After the draw period ends, the line enters repayment and the payment rises to repay the balance over the remaining term. Second-lien lenders set their own qualifying method. When a first mortgage being sold to Fannie Mae has a HELOC behind it, Fannie counts the HELOC's required payment in your monthly debts, and if the HELOC doesn't require a payment, there's no monthly debt to count from it (Selling Guide B3-6-05).
A HELOC changes character over its life. During the draw period, you can borrow up to the limit, repay and borrow again. When the draw period ends, the line stops advancing and the balance is repaid over the repayment period, often with a noticeably higher payment because principal is now included. In Texas, the constitution requires HELOC installments at least monthly, starting within two months, that cover at least the accrued interest during the draw period and are substantially equal after it (Tex. Const. Art. XVI, Sec. 50(t)(8)).
Federal rules also let a lender freeze a line or reduce the limit only in specific situations listed in the agreement, including a significant decline in the home's value below the value used for the line, or a reasonable belief that you can't repay because of a material change in your finances. The lender can't change the terms just because it wants to (12 CFR 1026.40(f)(3)(vi)). If you're counting on a HELOC as an emergency reserve, know those terms before you need the money.
On a Texas homestead, a second lien that gives you cash isn't a casual add-on. It falls under Article XVI, Section 50(a)(6), and Section 50(t) adds rules specific to lines of credit. The main ones (Tex. Const. Art. XVI, Sec. 50):
For more on how Texas protects a homestead, see Texas homestead protection.
Some second liens have nothing to do with cash out. Some buyers use a second lien at purchase, for example to keep the first mortgage under a loan limit, and those purchase-money liens follow purchase rules rather than the home equity rules.
Down payment assistance often takes the form of a second lien too. An assistance second is a real lien even when no monthly bill is sent. It counts in the combined loan-to-value, and a later HELOC or home equity loan has to count it. Many of those seconds are deferred or forgivable over time, and their terms say what happens on a sale or refinance before forgiveness.
Refinancing the first lien while a second stays in place usually requires the second-lien holder to subordinate. When the old first mortgage is paid off, the second lien would naturally move up into first position, ahead of the new loan, and the new first-mortgage lender won't allow that. So the second-lien holder signs a subordination agreement agreeing to stay behind the new loan. Fannie Mae requires a resubordination agreement to be signed and recorded when a second stays in place on a refinance, unless state law keeps the second in its existing position (Selling Guide B2-1.2-04).
Second-lien holders review subordination requests on their own timeline, with their own criteria, often including the new combined loan-to-value and whether the refinance takes cash out. Some charge a fee. Start that request early. Assistance providers have their own subordination policies, and some don't subordinate at all.
A lender credit, by the way, isn't a second lien. It's pricing on the loan, and nothing is recorded against the house for it.
This example is made up to show how the Texas cap works.
Marcus and Elena own their homestead in Haltom City. They agree with the lender that it's worth $400,000, and they owe $250,000 on their first mortgage. Eighty percent of the value is $320,000, so the most all their homestead debt can total is $320,000. That leaves room for a HELOC with a maximum line of $70,000 at most, before any lender or investor limits. They want the line for a kitchen remodel paid in stages. They both sign, they close at the title company no sooner than 12 days after the required notice, and they have three days afterward to rescind. Over the next year they draw $25,000 and then $20,000, each above the $4,000 minimum, by requesting advances, not with a card. If they'd also had a down payment assistance second still on title, that balance would have reduced their room under the cap.
Weighing a HELOC, a home equity loan or a cash-out refinance on your Texas home? I'll lay out your first mortgage, your equity under the 80 percent cap, and what each option actually looks like for your goal, so you can see how much room there really is. Schedule a call, or when you're ready, start an application.
Links checked Oct 21, 2026.
About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.
Equal Housing Opportunity.
Last reviewed: Oct 2026