Is there a prepayment penalty if you payoff your PACE loan early?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

The answer to your question depends on your PACE loan provider and your specific loan terms.  If you are required to pay a prepayment penalty, the terms of the penalty should be outlined in your loan documents.  Additionally, the prepayment penalty should have been disclosed to you before your loan closed.

I recommend that you review your loan documents carefully to understand any penalty you may be required to pay if you payoff your loan early.  Simply put, if your loan documents do not include a prepayment penalty provision then you are not required to pay one.

In general, PACE loans that were originated after 2017 do not have prepayment penalties while loans that were obtained before 2018 are more likely to include a penalty.  Again, we advise you to review your loan documents to confirm your specific terms but this timing information may be helpful to keep in mind.

Please note that there is no national law or regulation that governs PACE loan terms.  This means a lender in one state may include a prepayment penalty while another lender in a different state does not.

This also means that if you are considering getting a PACE loan you should try to negotiate the removal of any prepayment penalty the lender attempts to include.  Other financing options such as a mortgage, home equity loan or HELOC (home equity line of credit) may not charge a prepayment penalty so there is no reason you should pay one with a PACE loan.  

If your loan does not have a prepayment penalty, paying it off early can provide multiple benefits including lowering your property tax bill.  Reducing your tax bill lowers your total monthly housing expense and can save you a significant amount of money in the long run.  Lower property taxes can also make your home more attractive when you decide to sell it.

Eliminating the loan can also lower your financing costs because PACE loans tend to have higher interest rates than other home financing options such as a home equity loan, HELOC or mortgage.  Because you pay the loan through your property taxes, borrowers tend to overlook the interest expense associated with a PACE loan but lowering your rate by even half a point can significantly reduce your payment.  Because the loan length is usually ten to twenty years, your savings can really add up over time.   

Paying off a PACE loan can also make your home easier to sell.  Some mortgage lenders do not provide financing on homes with PACE loans which means that if you plan to sell your home in the future a prospective buyer may be required to pay off the PACE loan to purchase the property.

This is an additional and potentially significant cost for prospective home buyers and they may not have the resources or be able to afford a large enough mortgage to both purchase the property and retire the PACE loan.  Additionally, if a lender requires home buyers to pay off the loan, that may push their loan-to-value (LTV) ratio above the lender's limit and they may not be able to qualify for the mortgage.

For example, if a home that is for sale for $100,000 also has a $10,000 PACE loan, that effectively makes the sales price $110,000, making it less affordable for potential home buyers.  In short, it is generally more challenging to buy a home without a PACE loan.

Finally, removing your PACE loan enhances your financial flexibility.  In addition to lower your property tax payments and potentially boosting your monthly cash flow, paying off the loan can make it easier to refinance your mortgage.

Just as some lenders do not offer mortgages to buy homes with PACE loans, some lenders do not refinance mortgages on homes with PACE loans.  If your property value is high enough and you can qualify for a loan to refinance both your current mortgage balance as well as the PACE loan, you may be able to reduce your total loan payments and improve your financial flexibility going forward.  Additionally, your lower property tax bill and monthly payments may make it easier to qualify for the refinance, depending on your mortgage terms.  

To summarize, although you should always keep in mind the cost of any potential prepayment penalty, eliminating a PACE loan can provide multiple advantages for homeowners.  If your loan does not have a prepayment penalty, there is no downside to paying off your loan early.  If your loan includes a prepayment penalty you should weigh the cost of the penalty against the financial benefits provided by paying off the loan.

You can contact lenders in the table below to learn more about your refinance options.  We always recommend that you compare at least five proposals to find the loan with the lowest mortgage rate and closing costs.

Sources

"Property Assessed Clean Energy Programs."  Office of Energy Efficiency & Renewable Energy.  U.S. Department of Energy, 2020.  Web.