What are the best options to refinance a PACE loan?
There are three main options to refinance a PACE loan:
home equity loan or home equity line of credit (HELOC)
standard mortgage refinance program
home renovation mortgage program
The option that is right for you depends on many factors including your loan amount, mortgage balance, property value and personal financial goals. I review each financing alternative below including positives and negatives and when each option makes sense. This information should help you determine the PACE loan refinance option that best meets your needs.
Home Equity Loan or HELOC
If you want to keep your current mortgage in place and only refinance your PACE loan then you should consider a home equity loan or line of credit (HELOC). In this scenario your current first mortgage stays in place and you use the the home equity loan or HELOC to pay off the PACE loan.
Using a home equity loan or HELOC to refinance a PACE loan usually makes sense when you have attractive terms for your mortgage such as a low interest rate. A home equity loan or HELOC also usually permits a higher combined loan-to-value (CLTV) ratio than a standard refinance, which may be helpful if you have limited equity in your home.
Review How a Home Equity Loan Works
Additional benefits of a home equity loan or HELOC include lower closing costs than for a refinance. Plus, because the loan amount is smaller, your total interest expense over the life of the loan is lower, which may make a home equity loan or HELOC a more cost-effective financing solution.
The table below shows home equity loan and HELOC rates, fees and program terms. A home equity loan is usually the better option for paying off a PACE loan because you have a pre-determined use of proceeds and fixed interest rate. We recommend that you reach out to multiple lenders to select the program that is right for you.
Cash Out Refinance
With a cash out refinance you use the equity in your home to replace both your current mortgage and PACE loan with a new mortgage. This option makes the most sense when you can lower your mortgage rate by refinancing.
If the interest rate on your new mortgage is lower than both the rate on your current mortgage and the PACE loan then you can reduce your monthly debt expense and lower your interest cost. The closing costs for a standard refinance are also usually lower than for a renovation mortgage program (which we discuss below) plus the timetable is shorter, saving you both money and time.
We should highlight that most lenders permit a maximum loan-to-value (LTV) ratio of 75% - 80% for a conventional cash out refinance or 85% for an FHA cash out refinance, which limits the mortgage you are eligible for. If you do not have a lot of homeowners equity, then a cash out refinance may not permit you to pay off both your current mortgage and the PACE loan. If you have sufficient equity then this approach may be a cost-effective way to refinance a PACE loan and lower your total debt payments.
The table below shows refinance rates and fees for leading lenders in your area. We recommend that you contact multiple lenders to understand the mortgage you qualify for and to compare loan terms.
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Please note that some borrowers want to refinance their first mortgage but keep their PACE loan in place but most lenders do not allow this. In this scenario the PACE loan becomes the senior loan which could interfere with the lender's ability to recover their principal if you default on your mortgage. This is why you are almost always required to pay off a PACE loan in full when you refinance.
Home Renovation Mortgage Programs
Home renovation mortgage programs enable you to purchase a home or refinance an existing mortgage and include the cost of significant home improvements in your loan amount. While these programs are usually used to buy fixer uppers or finance major renovations, they can also be used to refinance your current mortgage and a PACE loan.
The key benefit of these programs is that they permit a much higher LTV ratio than a standard mortgage refinance program. So if you do not have a lot of equity in your property -- which applies to many PACE loan borrowers -- then a home renovation mortgage may be the right refinance program for you. We summarize the three main home renovation mortgage programs below. Click on a program title to review more detailed information.
HomeStyle Renovation Mortgage Program. The Fannie Mae HomeStyle Renovation Program enables borrowers to refinance the mortgage on their existing home and include funds to pay off a PACE loan in the mortgage amount. In fact, the application process for a HomeStyle Renovation Mortgage is streamlined if the loan proceeds are used to pay off a PACE loan as opposed to paying for property renovations.
The program also permits an LTV ratio of 97% for a single family, owner-occupied property. Plus, unlike the FHA 203(k) program described below, the HomeStyle Renovation Program does not charge an up front mortgage insurance fee, although you are required to pay monthly PMI if your LTV ratio is above 80%. The HomeStyle Renovation Program is provided by participating lenders such as banks, mortgage brokers and credit unions.
CHOICERenovation Mortgage Program. The Freddie Mac CHOICERenovation Program is another conventional renovation mortgage option that enables you to refinance your mortgage and a PACE loan. The maximum LTV ratio for the program is 97% for a one unit primary residence.
The negatives of the program are that you may be required to pay a higher mortgage rate and closing costs and it may take longer to process your mortgage. The CHOICERenovation Mortgage Program is also offered through traditional lenders.
FHA 203(k) Mortgage Program. In most circumstances, you can use the FHA 203(k) Program to refinance your existing mortgage as well as any PACE loans against your property. The FHA 203(k) program also uses a higher LTV ratio of 97.75% for a refinance.
The downsides to the program are that you are required to pay an upfront and monthly FHA mortgage insurance premium (MIP) which are extra costs. The good news is that FHA mortgage rates are lower than conventional loan rates, which offsets these added expenses.
Please note that it may be easier for you to refinance with the standard FHA Program as opposed to using an FHA 203(k) mortgage. We recommend that you review your options with multiple lenders to determine the program that makes the most sense.
The final point to consider before you refinance a PACE loan is that you may be required to pay a prepayment penalty if you pay off your loan early. We advise you to review your loan documents to understand if this loan term applies to you as the penalty may cost thousands of dollars depending on your loan amount and other factors.
You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by lender type and loan program. For example, you can find top-rated lenders that offer home renovation mortgages and home equity loans.
Sources
"Understanding Cash-Out Refinances." My Home by Freddie Mac. Freddie Mac, 2019. Web.
“What is a home equity loan?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.
“My lender offered me a Home Equity Line of Credit (HELOC). What is a HELOC?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.
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