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What are the best options to refinance a PACE loan?

What are the best options for refinancing a PACE loan? I tried to do a regular refinance and ran into some challenges due to loan-to-value ratio.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

You have three options to refinance your mortgage and pay off your PACE loan: 1) standard refinance, 2) Fannie Mae HomeStyle Renovation Mortgage; and 3) FHA 203(k) Home Renovation Mortgage. I outline these programs below and you can click on the blue program title below to review detailed information about each option.   If you are only focused on refinancing the PACE loan and want to keep your current first mortgage in place, then a home equity loan or HELOC may be a good financing option.

Refinance. With a regular refinance you obtain a new mortgage to pay off your existing mortgage as well as your PACE loan. Specifically, you would do a cash out / debt consolidation refinance and use the equity in your home to replace both your mortgage and PACE loan with a new mortgage. The issue that you have probably run into is that most lenders do not permit you to refinance the mortgage on a home that has PACE loans against it unless you pay off and eliminate the PACE loan when you refinance.  Many borrowers want to refinance their first mortgage but keep their PACE loan in place but most lenders do not allow this with standard refinance programs because the PACE loan becomes the senior loan which could interfere with the lender's ability to recover their loan in the unfortunate event that borrowers default on their mortgage.  Requiring borrowers to pay off their PACE loan when they refinance may create an issue because some borrowers do not have sufficient equity in their homes to both pay off their existing mortgage as well as their PACE loan.  For a cash out / debt consolidation refinance most lenders permit a maximum loan-to-value (LTV) ratio of 75% - 80%, which limits the size of the mortgage you can qualify for.  The positives to a standard refinance are that closing costs are usually lower and the timetable is shorter as compared to a Fannie Mae HomeStyle Renovation Mortgage or FHA 203(k) Loan. I certainly think it is worthwhile to have conversations with multiple lenders to understand if the refinance option is feasible for you.

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HomeStyle Renovation. The Fannie Mae HomeStyle Renovation Mortgage Program enables borrowers to refinance the mortgage on their existing home and include funds to renovate the property or pay off PACE loans 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 new home renovations. For example, borrowers that use a HomeStyle Renovation Mortgage to pay off PACE loans are not required to obtain an energy report, which saves you money and time. Additionally, the LTV ratio requirements for a HomeStyle Renovation Mortgage -- up to 95% for a single family, owner-occupied property -- are also more flexible than for a standard refinance. Plus, unlike the FHA 203(k) program described below, the HomeStyle Renovation Mortgage Program does not charge a one-time and ongoing FHA mortgage insurance premium.

FHA 203(k). The FHA 203(k) Loan Program is similar to the HomeStyle Renovation Mortgage Program and enables home owners to refinance their current mortgage as well as the cost of significant rehabilitation, remodeling and repairs to the home with one FHA loan. Under most circumstance borrowers can use the FHA 203(k) Program to refinance their existing loan as well as any PACE loans against a property. Like the Fannie Mae HomeStyle Renovation Program, the FHA 203(k) program also uses a more flexible LTV ratio guideline -- up to 97.75%. The downsides to an FHA 203(k) loan are that borrowers are required to pay an upfront and ongoing FHA mortgage insurance premium which is an extra cost. Please note that it may be easier for you to refinance with the standard FHA Mortgage Program as opposed to using the FHA 203(k) Program and a lender can review your options to determine what program works best for you.

Home Equity Loan.  If you would like to keep your current mortgage and only refinance your PACE loan then you should consider a home equity loan or line of credit (HELOC).  In this financing scenario your current first mortgage stays in place and you use the the home equity loan to pay off the PACE loan.  Home equity loan is usually less expensive than a full mortgage refinance plus you can keep your first mortgage which is beneficial if your interest rate is low.  If you do not have a significant amount of equity in your home it may be challenging to qualify for a home equity loan but eliminating the PACE loan may help you qualify.  You can shop home equity loan lenders by clicking HOME EQUITY LOAN RATES

After reviewing the resources on FREEandCLEAR we recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as not all lenders offer home renovation mortgage programs. Be sure to ask about a straight refinance as well as the HomeStyle Renovation and FHA 203(k) and mortgage programs when you speak with lenders. 

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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