Texas lenders raced into a new era last week after voters approved changes in the Texas Constitution that allow Texans to obtain home-equity loans.

The amendments will become effective Jan. 1, which means banks and other lenders can start taking applications right away, but they can't close the loans until after New Year's.

The market for home-equity loans in Texas is expected to be about $10 billion, lenders say. Provisions dating back to the birth of the Republic of Texas prohibited homeowners from using the equity in their homes as collateral for loans, except to pay for home improvements or to pay taxes. The homestead protection, designed to protect homeowners from foreclosure by unscrupulous lenders, was preserved even as the 49 other states permitted home-equity lending. The advantages of the loans are lower interest rates because the loans are secured by real estate and the fact that interest paid on an equity loan is generally deductible for federal income tax purposes. Fears that homeowners would be pressured by lenders to surrender their homes led Texas lawmakers to impose tough restrictions on home-equity lending in the state. Under the new Texas law, homeowners won't be able to incur debt, including first and second mortgages, that exceeds 80% of a home's market value. Also, loans will have to be for specific amounts of time for specific amounts of money, which means borrowers can't establish a line of credit that can be drawn on when needed, such as when college tuition bills come due. The law also allows for a "cooling off period" during which time a borrower could back out of a loan. The law also forbids banks from trying to collect more money from a borrower if a foreclosure does not recover the amount owed. The new law prohibits lenders from forcing borrowers to use home-equity loans to settle other debts. The new law also permits "reverse mortgages," which allow people over 55 years old to tap their equity. The amendment received the support of about 60% of the Texas voters who cast ballots.

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