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How a PACE Loan Works

How a PACE Loan Works

  • Pros Cons
    • Finance 100% of the cost of significant energy efficient upgrades with no money down
    • The loan is attached to property, not the borrower, so it may transfer to the new owner if you sell your home
    • Potential to increase property resale value without bearing full cost of improvements
    • Loan term of up to 30 years, repaid as part of property tax bill
    • Program eligibility based on property value, equity and location as opposed to a borrower’s credit score and financial profile
    • Reduce monthly utility costs and possibly total cost of owning a home
    • Potential tax credits and energy efficiency utility rebates
    • Very limited program availability - small number of states
    • Many lenders do not permit PACE loans on properties with an existing mortgage
    • Increased property tax bill
    • Higher interest rate than other energy efficient mortgage alternatives
    • Limited loan amount
  • PACE Loan Program Overview
  • A Property Assessed Clean Energy loan, called a PACE loan for short, enables you to finance 100% of the cost of energy efficiency, renewable energy generation and water conservation property improvements through a loan that is attached to the property as opposed to the borrower. When you obtain a PACE loan, a new assessment is added to your property and you pay the assessment when you pay your property taxes. In short, you re-pay the loan by paying higher property taxes.

    Because the loan is assessed to the property and not the borrower, you typically no longer pay the loan after you sell your home. Instead, the new owner of the property continues to repay the PACE loan through ongoing property tax payments. If that individual sells the property, then the next owner continues to repay the loan through his or her property tax payments, and so on, until the loan is repaid in full.

    PACE loans remove several significant obstacles to implementing large energy efficient property improvements. First, 100% of the cost of improvements is financed which means the homeowner is not required to contribute any funds up-front, so no down payment. Second, because the loan is attached to the property and not the borrower, you do not need to worry about spending a lot of money for improvements and not realizing the benefits of the improvements because you plan on selling the home in the near-to-medium term.

    For example, many homeowners may be reluctant to pay thousands of dollars to install solar panels because a) they do not have the funds; and, b) they plan on moving within the next several years. From the homeowner's point of view, why would they spend all that money if they are going to sell the home relatively soon?

    A PACE loan addresses those concerns because 100% financing means the homeowner is not required to contribute any funds toward the energy efficient project.  Plus the loan is attached to the property, through an assessment, so the homeowner is typically not required to pay the loan after the property is sold.

    PACE loans represent a compelling financing alternative to using an energy efficient mortgage program or obtaining a second mortgage, home equity loanpersonal loan, or using a credit card, to pay for energy efficient home improvements. The program enable homeowners to achieve the same cost benefits from implementing upgrades without imposing the same financial obligations or commitments as a new mortgage or home equity loan. For example, with a new mortgage you are typically required to make a down payment and with a home equity loan you are required to repay the loan in full when you sell your home.

  • How PACE Loans Work
  • PACE loans work differently than other home financing options such as a mortgage or home equity loan. Instead of going to a traditional lender such as a bank, to get a PACE loan you go to a program provider. Program providers can be private companies or not-for-profit local housing, energy or environmental organizations.

    The program provider determines your eligibility, reviews your energy efficient project, helps you select a contractor to implement your project and provides the financing to complete your project. In some cases PACE program providers help you obtain the necessary building permits, review project bids to make sure you are not over-paying, verify contractor licenses and ensure that certified energy-efficient products are used for your project.

    Program providers also arrange the financing they provide to homeowners, typically from private investors, and work with local governments to have the PACE assessment added to your property tax bill. Because the loans require a change to your property tax bill and the loan is re-paid through your property taxes, the program must be authorized by your local government. Homeowners should think of the program as a public-private partnership.

    At the end of the process, your energy or water efficiency home improvement project should be complete and the new assessment is added to your property tax bill for the term of the loan, which can be five to thirty years, depending on the useful life of the improvements. The interest rate on a PACE loan is fixed and cannot increase even if mortgage rates go up. Please note that the interest rate on a the loan is typically higher than other energy efficient mortgage programs such as the Fannie Mae HomeStyle Energy and the FHA EEM programs.

    Although homeowners pay higher property taxes going forward, the cost is typically outweighed by PACE loan benefits including reduced utility costs and an increase in property value. Homeowners may also receive rebates or tax credits for installing energy and water efficient products. Additionally, the interest on the PACE loan may be tax deductible, offering homeowners another financial benefit. Homeowners should consult a tax professional and their program provider to determine the rebates, tax credits and deductions that apply to them.

    PACE loan interest rates tend to be higher than the rates for other programs.  We recommend that you compare the interest rate and fees for a PACE loan to other home improvement financing options including home equity loans and HELOCs.  Shop multiple lenders in the table below to understand the home improvement programs they offer and to request loan terms.  Comparing lenders and programs enables you to find the home improvement program that best meets your needs.

  • Rate Details*
    Loan Program:  
    Monthly Payment:  
    APR:  
    Rate:  
    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
    Total Lender Fees:  
    Loan type:  
    Property Value:  
    Loan to Value:  
    Credit Rating:  
    Date Submitted:  
    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    (Estimated)
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Home Equity Loan Rates in , as of November 21, 2018
    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • PACE Loan Requirements
  • Qualifying for a PACE loan is very different than qualifying for mortgage. Whereas mortgage lenders focus on your credit score, debt-to-income ratio and employment history, program providers focus on the value of your home and how much equity you have in your property.

    Although program providers pull your credit report when you apply for the loan, they are much more focused on the actual property, instead of the borrower, to determine if you qualify for the loan. Properties must be located in areas where the PACE program is offered and homeowners must have sufficient property equity to support the new loan. Property eligibility and borrower qualification guidelines can vary by program provider.

  • Are there PACE Loan Limits?
  • There are no set limits on the size of a PACE loan, like with other energy efficient mortgage programs, but loan amounts are effectively limited by your property value and equity. For eligible properties, qualified homeowners may be able to borrow up to approximately 15% of their home’s value with a loan although program providers may use different criteria to determine your loan amount.

    Other energy efficient mortgage programs or a home equity loan may enable homeowners to take out larger loans to pay for property improvements. Additionally, please note that 100% of the proceeds from a PACE loan must pay for energy or water home improvements and homeowners are not permitted to receive any cash proceeds from the loan, like they would with cash-out refinance or a home equity loan.

  • What Types of Improvements Can I Finance with a PACE Loan?
  • Most energy and water efficiency home improvements qualify for the PACE loan program. Examples of potential home upgrades include the following items:

    • Advanced energy storage unit
    • Air sealing (applying caulking and weather stripping)
    • Air duct repairs, sealing or replacement
    • Bioler
    • Biomass furnace
    • Drought tolerant landscaping / artificial turf
    • Electric vehicle charging station
    • Energy efficient windows and doors
    • Fans
    • Fuel cell generation system
    • Heating, ventilation or air conditioner (HVAC) unit
    • Hot water heater
    • Hurricane-proofing
    • Insulation
    • Irrigation system
    • Lighting system
    • Low-flow faucets and showerheads
    • Roofing
    • Smart thermostats and controls
    • Solar energy system
    • Wind energy system
    • Water-efficient toilet and shower
  • Very Limited Program Availability
  • At this point you may be thinking that the PACE loan program sounds too good to be true -- there has got to be a catch. And there is a really big catch: the program is only available in a small number of cities and states.

    Because PACE loans require the participation of local municipalities to change property tax bills and collect loan payments, the program must be authorized by state and local governments. Currently, the program is only widely available to residential homeowners in a small number of states including California, Florida and Missouri and select cities in New York state. More states and cities are adopting the program but current availability is highly limited at this stage.

    • Search for PACE program providers in your state PACE map

    Please note that more than 20 states currently offer the PACE program for commercial buildings as opposed to for residential homes.

    Use the FREEandCLEAR Lender Directory to search for twenty-five loan programs including multiple home improvement and renovation programs.

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  • Does My Current Mortgage Lender Allow PACE Loans?
  • Many mortgage lenders do not permit PACE loans, which is another significant factor that limits their use by homeowners. Most loans are structured as first lien notes, which technically means they are senior to the mortgage note on your home and would be repaid before the mortgage in the event of foreclosure. Most mortgages, however, have a clause that prohibits borrowers from obtaining a loan that is senior in priority to the mortgage which means adding a PACE loan to the property violates the terms of the mortgage. In other words, most borrowers cannot take out an additional loan that can be repaid before their mortgage (even if from a practical standpoint borrowers pay back both loans at the same time).  For example, FHA mortgages are not permitted on properties with PACE loans. 

    A PACE loan may also become an issue if you try to sell your home.  Because most lenders do not offer mortgages on homes with PACE loans, the buyer of a home with a PACE loan may be required to pay off the loan in order to obtain a mortgage to buy the property.  Requiring a buyer to pay off the loan effectively increases the purchase price of the property and the borrower may not be able to afford to buy the property and pay off the loan or the buyer may not be able to obtain mortgage financing to do both.  So while PACE loans enable you to make improvements and upgrades that increase your property value, they can represent a significant obstacle when you decide to sell your home.

    Not all PACE loans are structured as first lien notes and not all lenders or mortgages prohibit them. Borrowers with existing mortgages should check with their lender and PACE program provider to determine the feasibility of a loan. Additionally, this potential constraint does not apply to individuals who do not have a mortgage and own their homes free and clear.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources
  • Sources

    PACE Program Overview: https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs

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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