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Home renovation financing, and specifically PACE loans, got a major shout out on the most recent episode of Last Week Tonight with John Oliver.
If you didn’t watch the full episode, here’s a quick recap:
- John Oliver discusses PACE loans, a government sponsored loan option created to fund energy efficient home improvement projects for low income homeowners through property taxes.
- PACE loans originated in California in 2008 through an idea from Cisco Devries, the former chief of staff to the mayor of Berkeley.
- After their trial run in Berkeley, they exploded all over CA and are now available in California, Missouri and Florida and soon to be available in New York and Ohio.
- John Oliver explains how PACE loans work and major issues with the business model that have some homeowners backed into a corner of debt. He ends the episode by encouraging everyone to avoid them at all costs.
Read our analysis below to learn more about these loans, their business model, and better options for homeowners looking to fund energy efficient home improvements.
What Are PACE Loans?
PACE loans are zero down, government sponsored tax liens that fund energy efficient improvements, like solar panels. PACE stands for “property assessed clean energy program.” The average PACE loan size is $25,000, and homeowners pay back that loan as property taxes over a period of 5-25 years (up to 30), in addition to existing property tax bills.
Homeowners can get approved for PACE loans quite quickly - often contractors will sell these loans door to door and all that’s required is a quick conversation and a signature on a digital contract.
Homeowners are able to borrow up to 15% of a home’s value, but the exact number can vary by lender, and some mortgage lenders don’t even allow PACE loans (like Fannie Mae and Freddie Mac). The total loan-to-value ratio of the property can’t exceed 97%.
PACE loans are first-lien loans, which means that they are in first position, over your primary mortgage, and have priority when it comes to paying them back.
Some PACE loans also contain prepayment penalties - but this is more common for loans originated before 2017. Interest rates for PACE loans range from 4% - 9%, and closing fees are slightly above 6% of the loan total.
Unlike most other renovation loans, PACE financing lenders don’t consider a homeowner’s credit score or income - loan qualification is solely based upon property value, location and equity.
Here’s a partial list of home improvements that can be financed through PACE loans:
- solar panels
- heat pumps
- air conditioners
- duct upgrades
- new doors
- new windows
- LED lighting
- cool roofing
- low-flow appliance installation
- landscaping irrigation
- natural disaster preparedness
How Are PACE Loans Financed?
While the PACE program is government-backed, private lenders like Ygrene fund these loans.
However, unlike renovation loans, PACE financing doesn’t have a traditional loan model.
Homeowners pay back PACE financing through annual tax assessments, not monthly payments. If a homeowner fails to pay back these taxes, they could lose their home.
Does My House “Borrow The Money”?
PACE lenders often advertise the financing model with the phrase “your house borrows the money, not you.” But what does this actually mean?
Basically, if you sell the home while you still owe money toward the PACE debt, it will transfer over to the next owner, rather than remain with you.
Also, if you fail to make payments on tax assessments, you’ll lose your home.
At the end of the day, you still pay the property taxes, and therefore, you are borrowing the money to pay for your home improvements. As John Oliver said, inanimate objects cannot borrow money.
Alternative Government Programs
Many people have concerns about this program, particularly the business model. Some homeowners who don’t understand the complexities of the PACE program are quickly locked into a contract where they could potentially lose their home, and oftentimes contractors target vulnerable, minority communities to make these transactions.
Also, unlike other renovation loans, lenders don’t consider income or credit score, which means they could be approving homeowners that will have a hard time paying back their debt.
There are several other government programs created to fund energy efficient improvements that don’t come with these downsides:
Solar and Energy Loan Fund
This non-profit provides unsecured loans for energy efficient improvements. Loan sizes range from $3,000 to $25,000, interest rates from 8-11%, and they’re personal loans, so homeowners aren’t putting their homes on the line when they take them out.
Single-Family Affordable Solar Homes Program
This is a California program for low income families that provides incentives for installing solar panels. According to GRID Alternatives, the program reduces electric costs by an average of 75% over a period of 25 years. GRID Installs solar electric systems for low-income homeowners with the help of volunteers, job-trainees, and subcontractors.
Energy Savings Assistance Program
Another California program, ESA, provides no cost weatherization services to low-income households that meet CARE income guidelines.
Low Income Weatherization Program
This program provides free weatherization services, funded by the Department of Energy, to low income households nationwide.
Freddie Mac GreenChoice Mortgage
While Freddie Mac doesn’t allow its homeowners to take on PACE financing, they do offer primary mortgages combined with renovation financing for energy efficient upgrades.
Loans max out at 15% of the “as completed” value of the property, and the maximum LTV ratio is 97%.
There are also several loan options available to fund home improvements that aren’t specific to energy efficient improvements.
RenoFi Financing vs. PACE Financing
RenoFi Loans, a new type of renovation home equity loan, can be used to make all the energy efficiency improvements that qualify for PACE financing.
RenoFi Loans are second position home equity loans that offer more borrowing power than traditional home equity loans. On average, homeowners can borrow 11x more.
If you’d like to install solar panels, energy efficient appliances and more, RenoFi Loans can provide financing options for $20,000 to $500,000 for qualified homeowners.
Unlike PACE loans, RenoFi’s lending partners (credit unions) do a thorough analysis of homeowners’ income, credit score, renovation plans, and more, to make sure that they are qualified and ready to take on the loan amount and understand the loan product.
Homeowners can borrow up to 90% of the after renovation value of their home.
Check out our Real Customer Testimonials, which include before and after photos of home renovations utilizing a RenoFi Loan.
The main things you need to know about RenoFi Loans are:
- You can borrow between $20k and $500k
- Low, fixed rates (varies by state and lender)
- Terms of up to 20 years
- Ability to borrow up to 90% of your home’s after renovation value
- The full loan amount is available at closing
- You won’t need to refinance your existing mortgage
If you’re looking to make energy efficient improvements to your home, RenoFi Loans are a great option to finance your project.
Use our RenoFi Loan Calculator , schedule a call or chat online with one of our advisors today. We’ll show you how your home renovation project can benefit from a RenoFi Loan!