There is usually no prepayment penalty if you payoff a PACE loan before the end of the loan term. I recommend that you review your PACE loan documents to confirm this information but it would be very unusual if your loan requires you to pay a penalty.
While PACE loans offer borrowers several advantages including financing energy efficient home improvements, zero down financing and the loan being attached to the property and not the borrower, paying off a PACE loan early can also offer homeowner several benefits. Because a PACE loan is added to your property assessment, paying your loan off lowers your property tax bill. Reducing your ta 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 a PACE 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 (home equity line of credit) or a first mortgage. Because you pay a PACE loan through your property taxes, borrowers tend to overlook the interest expense associate with the loan but lowering your interest rate by even half a point can reduce your loan payments significantly. Because the term of a PACE loan is usually ten years or longer, lowering your interest rate and loan payment 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 payoff 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 payoff 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 is for sale for $100,000 and also has a $10,000 PACE loan, that effectively makes the price of the home $110,000, making 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 the mortgage rate for your new loan.
To summarize, eliminating a PACE loan provides multiple advantages for homeowners. If you are thinking about paying off your loan, I recommend that you review our explanation of the best options for refinancing a PACE loan which can help you determine the right approach for you. You can also contact the lenders below to learn more about your financing options. We always recommend that you compare at least five refinance proposals to find the loan with the lowest interest rate and closing costs.