PACE Loan

Pace loan financing allows property owners to finance energy-efficient and renewable energy upgrades. Water and energy conservation is good for the environment and can lower utility bills. However, the charges associated with these upgrades, like solar panels and drought-resistant landscaping, can be a significant barrier to many homeowners.

Fortunately, PACE stands out as a smart solution, providing an affordable and practical way to finance energy-efficient projects. 

In this article, we will explore PACE loan financing, why it is a smart financing solution, how it works, and its benefits.

PACE Financing Overview

PACE loan financing is a US Department of Energy program that has been financing several commercial and residential properties since its inception. It is important to note that PACE loans are tied to the property instead of an individual. This means the loan approval is based on the equity in the property, which acts as collateral to secure the loan. The borrower’s credit score is not a factor.

Property owners are required to repay PACE loans when paying their property taxes. If the repayment is incomplete when a property is sold, the assessment remains with the property, meaning the balance will be transferred to the new owner.

While the PACE loan is repaid as your property tax assessment, the borrowing is considered a lien against the property. Because of this, some mortgage lenders may decline to give you a mortgage if you want to buy a home that is attached to a PACE loan.

How PACE Loan Works

While home improvements increase the value of your home, financing them can be heart-wrenching if you don’t have enough cash. Fortunately, PACE financing has become the smart solution for energy-efficient upgrades by helping eliminate upfront cost barriers through 100% financing. 

The PACE loan has an extended repayment period ranging from 10 to 30 years, making it convenient for many homeowners. These loans are used for energy-efficient projects, including solar panel installation and energy-efficient roofing. Also, if you are looking to upgrade your LED lighting or for seismic retrofitting, a PACE loan can be an ideal solution. 

The first step to securing a PACE loan is to ensure the state you live in has passed PACE-enabling laws, which allow local governments to provide financing on energy-efficient upgrades to property owners. Homeowners in California, Florida, and Missouri have benefited from PACE financing since September 2022, but the legislation is active in 38 states, including the District of Columbia, and is gaining much traction.

Eligibility Criteria

Unlike conventional mortgages, to get a PACE loan, you should qualify for its less stringent lending criteria. Here is what it takes to qualify for a PACE loan:

• Home Equity: Your PACE loan eligibility is based on your home’s equity. Lenders will compare your home’s value against the total of your mortgage and the amount you want to borrow.
• Ability to Repay: Before approving your PACE loan application, the lender will verify your income to ensure you can make higher property assessments to repay the loan.
• Mortgage Payment History: Keeping your mortgage repayment current shows the lender that you will also pay your PACE loan on time.
• Eligible Upgrades: Before the lender approves your loan, they will verify if your project is covered through the PACE loan.
• FICO Score: Though your credit score is not a consideration with PACE financing, recent issues in your credit reports may raise questions. 

Benefits of a PACE Loan

Property Assessed Clean Energy loan presents several advantages to property owners, making it a smart choice for those interested in energy-efficient upgrades. Let’s take a look at some of the benefits:

100% Financing

Unlike other traditional financing methods, PACE financing doesn’t require upfront costs or down payments, which can be a barrier to some property owners. A PACE loan covers the project’s entire cost, allowing you to install energy-efficient upgrades without dipping into your pockets.

Extended Financing Period

PACE loans have a long repayment period of 10 to 30 years. This results in reduced payments, making it easier to manage your finances. Also, PACE is structured with fixed interest rates, keeping the repayment amount constant over the life of the loan.

Can be Transferred to the Next Owner

Since the PACE loan is tied to the property and not a property owner, the loan can be transferred to the new owner if you decide to sell the property. This provides an advantage if you are not planning to stay on your property for long. The new owner will benefit from new energy-efficient upgrades and continue repaying the remaining loan amount.

Helps Increase Property Value

Renewable energy installations and energy-efficient upgrades can increase the value of your home or property. These home improvement upgrades will improve the marketability of your property as buyers are mostly willing to buy homes that are environmentally friendly and can provide lower energy costs. A PACE loan can help install these upgrades and increase your home value.

Increased Energy Savings

PACE loans help property owners install energy-efficient upgrades like high-efficiency solar panels, HVAC systems, insulation, and other upgrades that reduce utility costs. These savings can offset the loan amount over time, making it a smart choice.

Easy to Qualify

The eligibility criteria for a PACE loan are relatively easy compared to other alternative financing for expensive home improvements like home equity loans. Your credit score is not a consideration with the PACE loan, but you must have been paying your property taxes efficiently.

Disadvantages of a PACE Loan

While PACE financing has numerous benefits, disadvantages exist also. For instance:

Only Available to Property Owners

PACE financing is only available to those who own property. So, suppose the property or home you live in is not yours, and you need energy-efficient upgrades. In that case, you must dig deep into your savings or consider other home improvement financing alternatives like the Renofi HELOC home improvement loan.

With a Renofi LTV HELOC, you can get the financing you need. The loan leverages the after-renovation value of your home, allowing you to access more funds.

You Might Pay Large Repayment Amount

Even though PACE loans have a long repayment period, you may pay large amounts of money once or twice a year. This is because property assessments are paid once or twice a year instead of monthly payments, which can lead to bulkier payments.

Higher Interest Rates

While PACE offers 100% financing and is easier to qualify for, its interest rates are sometimes higher than alternative loans like the line of credit or home equity loans. 

Increased Risk of Foreclosure

The PACE loan is tied to the property, increasing the risk of foreclosure if you fail to make payments. Since PACE is considered a tax lien, it is generally in front of your mortgage lender, which means losing your home is possible even if you are making regular mortgage payments.

Can Cause Difficulties When Selling Your Home

It’s important to note that homes with PACE lien are not eligible for mortgage under Freddie Mac, Fannie Mae, or Federal Home Loan Banks. This could make it difficult to sell your home with a PACE loan to a buyer whose mortgage is obtained through a federal lending program. A PACE loan stays with the property and is passed over to the next owner.

Tips to Help Maximize a PACE Loan

With a PACE loan, you will get the entire financing of your energy-efficient projects. However, it’s good to maximize the money and get its worth. Here are some tips to help you out:

Talk to the Actual Lender

If you learned about PACE from a contractor, it’s time to have another talk with the actual lender of PACE financing organization. Getting the correct information from the people involved is vital to understanding what you are getting into and helping you make the right decision. Know how much you will pay and other terms that apply.

Understand the Terms

On the face value, PACE financing seems incredible. However, it’s important to understand its ins and outs before making the decision. Find out its interest rate and the closing costs you are required to pay.

Choose the Most Competitive Contractor

Don’t just settle for any contractor even though you are not paying cash up-front. Get quotes from several contractors and choose one that offers the most competitive pricing but provides high-quality services. 

You can ask for referrals from family or friends or thoroughly research the best contractors online and check online reviews concerning their services. Renofi provides a detailed guide on choosing the best contractor for your home renovation.

Alternatives to PACE Financing 

Even though PACE financing may be enticing, shopping around for other alternatives is important. Shop among credit unions, local banks, and online lenders for other affordable home improvement loans. 

For instance, Renofi offers home improvement loans that allow you to borrow up to 90% of the after-renovation value. Other alternative ways to finance your home improvements include:

FHA 203 (k) Loan

FHA 203K loans can be used to finance home improvements, and you only have to make a small down payment. You can borrow up to $35,000 of your mortgage to cover repairs, upgrades, or improvements on your home. These loans can cover any type of project, whether energy-efficient or not.

Home Equity Loan

A Home Equity Line of Credit, or HELOC, is a loan type that allows homeowners to borrow money against their home’s equity – the value of your home minus the mortgage you owe. These loans generally have lower costs than refinancing. 

With a Renofi HELOC, you can take advantage of your home’s after-renovation value, allowing you to borrow more than 100% of your current home value.

For example, imagine your home is currently valued at $500,000, and your outstanding mortgage balance is $400,000. You are planning a renovation and expect the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you can’t effectively borrow anything to fund your renovation.

A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after-renovation value. So, as you can see from this example, using a standard home equity loan results in your borrowing power being $0. A RenoFi loan allows you to borrow up to $176,000 thanks to the after-renovation value of your home. 

Cash-Out Refinancing

Cash-out refinance gives you an option of converting your home equity into cash. You can use the funds from a cash-out refinance to pay for energy-efficient upgrades.

Personal Loans

Another alternative to a PACE loan is having a personal unsecured loan that does not require putting a lien on your property. These loans don’t need an appraisal, so they are much easier to acquire. However, they have a higher interest rate since no asset is securing the loan.

Save and Pay Cash

Though it may not be the easiest option, you can consider delaying your project and saving money to pay in cash for energy-efficient upgrades. If you consider this option, you need to be more patient to save enough cash and avoid extra expenses on interest paid on borrowed money.

Considerations When Buying or Selling a Property With PACE

If you secured a PACE loan to fund your energy-efficient upgrades and still owe money by the time you sell your property, the new owner will continue repaying. It’s important to note that some buyers may be reluctant to take on such responsibilities, and it can even be difficult to finance the property with additional assessments.

If possible, you can pay off the PACE loan to make your property more appealing to potential buyers but charge a higher amount for the paid-off upgrades. On the other hand, if you buy a property with an existing PACE loan, ensure you understand how the debt will affect your transaction. You may choose to take over the payments if you find out that the upgrades are worth it and will contribute to lower utility costs.

Conclusion

A PACE loan provides a unique way of financing energy-efficient home upgrades. This loan is tied to your home’s property taxes and is paid through property assessments. While PACE has numerous benefits, including a longer repayment period and 100% financing, among others, it also has its set of drawbacks. Before considering a PACE loan, ensure you understand its terms by talking to an actual lender.

Besides PACE, other loan alternatives can finance your home improvement projects. For instance, you can consider personal loans, cash-out refinance, FHA 203 (k), and HELOC. At Renofi, we offer the best home improvement loans. For instance, we offer a fixed rate or variable rate on Renofi Home Equity without the need to refinance your first mortgage.

Additionally, our RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage. Contact Renofi today to learn more about our home improvement loans.