PACE Loan Pros and Cons
Because the PACE loan is assessed to the property and not the borrower, you typically are not required to pay off the loan or to continue to make payments if you sell your home. Instead, the new property owner continues to pay the PACE loan payments through property tax payments, and so on until the loan is paid off. Instead of working with a traditional bank, PACE loans are offered by program providers such as private companies or not-for-profit energy, environmental or housing organizations.
PACE loans offer home owners several advantages including 100% financing for energy efficiency home improvements, the loan being attached to the property and not the borrower and flexible loan qualification requirements. Significant PACE Loan Program considerations include most mortgage lenders not permitting PACE loans, limited program availability, higher property taxes and a higher interest rate as compare to other energy efficient mortgage (EEM) programs.
We review the full list of pros and cons for PACE Loan Program below. Borrowers should understand both the positives and negatives of a PACE loan to determine if it is the right green mortgage option for them.
PACE Loan Pros
Finance 100% of the Cost of Energy Efficient Upgrades
PACE loans enable home owners to finance 100% of the cost of energy efficient upgrades which means you are not required to contribute a down payment or personal funds toward the cost of the project. Making a down payment or paying upfront costs is one of the biggest obstacles to implementing major energy efficiency home upgrades. By providing 100% financing, the PACE Loan Program makes energy efficiency improvements financially feasible for more home owners.
Loan is Attached to the Property, Not the Borrowers
The key difference between a PACE loan and green mortgage programs or other home improvement financing options is that a PACE loan is attached to the property and not the borrower. With a PACE loan you do not make monthly payments like you do with a mortgage or home equity loan. Instead, an assessment is added to your property and you pay the assessment when you pay your property taxes. If you sell the property, you no longer pay the assessment and instead the new home owner pays for the PACE loan with their property tax payments. Whoever owns the home pays the assessment until the PACE loan is paid off. By attaching the loan to the property instead of the borrower, the PACE Program enables borrowers to realize the cost savings from energy efficiency home improvements without imposing the financial obligations of a new mortgage, home equity loan or HELOC, all which must be repaid in full when you sell your home.
Potential to Increase Property Value Without Paying Full Cost of Improvements
Home owners may be reluctant to pay for significant energy efficiency home upgrades if they plan on selling their home in the near or medium term. From a homeowner's perspective, it may not make financial sense to pay for major home efficiency improvements if you are not going to benefit from the cost savings of lower utility bills over an extended period of time. Because a PACE loan is attached to the property and not the borrower, the borrower is typically not required to pay-off the loan when the property is sold, which means the borrower is not responsible for the full cost of the energy efficiency improvements. Home owners, however, still benefit from the increase in property value due to the energy efficiency improvements if they decide to sell there home. For example, if you use a PACE loan to install a solar energy system that increases your home value by $50,000, you are typically only required to pay the PACE loan as long as you own the home. If you sell your home before the PACE loan is paid off, you benefit from the improved property value but the new home owner continues to pay off the PACE loan. So you benefit from the higher home sale value without paying the full cost of the improvements because you are not required to pay off the PACE loan in full when you sell your home.
Potential Tax Credits and Energy Efficiency Rebates
Many PACE Loan Program providers work with borrowers to identify potential tax credits and energy efficiency rebates that you may qualify for after making your home improvements. PACE loan providers usually specialize in green loan programs and are familiar with the numerous federal, state and local credits and rebates that are available to borrowers. Many of these tax credits and rebates are unique to a specific product, project or location and may not be known by most home owners. PACE Loan Program providers can help borrowers apply for and qualify for credits and rebates which help offset the cost of energy efficiency projects.
Flexible Loan Qualification Requirements
While most mortgage programs use standard borrower qualification requirements such as your monthly income and debt, employment history and credit score, PACE Loan Program qualification guidelines focus more on the property than the borrower. PACE Program providers assess the value of your home to determine if you have enough equity to support the PACE loan. Program providers use the as-completed value of the property reflecting the energy efficiency upgrades to determine what size loan you qualify for. Lenders also pull your credit report and review summary financial information but these are secondary inputs to the loan application and approval process. Because PACE Program qualification requirements are primarily based on the property instead of the borrower, PACE loans are well-suited for home owners with lower credit scores and moderate incomes who may not qualify for other energy efficient mortgage (EEM) programs.
Certified Contractors for Home Improvements
PACE Loan Program providers typically require that home owners work with certified contractors to implement energy efficiency home improvement projects. The program providers perform diligence and verify that contractors have updated licenses. The program providers also usually have agreements with the contractors that require them to use certified energy efficient products and adhere to customer service best practices such as honoring project bids and limiting cost overruns. Working with registered PACE Program contractors reduces the risk of fraud and provides home owners a greater lever of consumer protection.
PACE Loan Cons
Most Mortgage Lenders Do Not Permit PACE Loans
Most lenders do not permit PACE loans on properties they have financed with a mortgage. For example, the FHA program does not permit mortgages on homes with PACE loans. This is because most mortgages have a clause that prohibits borrowers from obtaining a loan that is senior in priority to the mortgage and PACE loans are usually structured as first lien notes which means they are repaid before the mortgage in the event of foreclosure. Borrowers with existing mortgages should check with their lender to determine if PACE loans are allowed under the terms of their mortgage. Additionally, borrowers who currently have PACE loans who are looking to refinance their mortgage should check with their new lender to determine if they can keep the PACE loan in place or if they are required to pay it off when they refinance. Finally, prospective home buyers should understand if there is a PACE loan on a home they want to buy as the loan could interfere with their ability to get a mortgage. For example, if a home listed for sale for $225,000 has a $25,000 PACE loan, the buyer's lender may require that the buyer pay-off the PACE loan as a condition to providing a mortgage. This means that prospective buyers either have to get a larger mortgage, which they may not qualify for, or use personal funds, which they may not have, to pay-off the PACE loan. Borrowers should work closely with lenders to determine if PACE loans are permitted with their current mortgage or how PACE loans impact a home purchase loan or refinance. Please note that not all lenders or mortgage notes prohibit PACE loans.
Limited Program Availability
The PACE Loan Program requires the participation of state and local governments to alter property tax bills and collect loan payments and only a small number of states and cities have adopted the program. PACE loans are available in less than five states with the program being the most common in California and Florida. The limited geographic availability of the PACE Loan Program restricts its use to a small number of home owners. More cities and states are expected to approve the PACE Loan Program in the future so borrowers should check with their local government to determine if the program is available in their area.
Increase in Your Property Tax Bill
Rather than making a monthly payment like you do with a mortgage or home equity loan, with a PACE loan you make your loan payment through your property taxes. With a PACE loan, a new assessment is added to your property and you pay the extra assessment when you pay your property tax bill. This is no different than paying for public infrastructure projects such as new schools or roads with additional property assessments except in this case the project is energy efficiency upgrades to your home. So although you do not make a monthly payment with a PACE loan, your property tax bill increases. An increase in property taxes increases your total monthly housing expense and borrowers should make sure they can afford the higher tax bill. Additionally, if you intend to sell your home, a higher property tax bill could dissuade potential buyers and affect the value of your home.
Higher Interest Rate Than Other Green Mortgage Alternatives
The interest rate on a PACE loan is higher than the interest rate on other green mortgage alternatives such as the FHA and VA Energy Efficient Mortgage (EEM) programs. So although you do not make a monthly payment with a PACE loan, you pay more in total interest expense if you own your home for the entire length of the PACE loan. Additionally, the interest rate on a PACE loan may be higher than the rate on a home equity loan or line of credit (HELOC), which are other alternatives for financing energy efficiency home upgrades. PACE loans are not directly comparable to energy efficient mortgage (EEM) programs or second loans but borrowers should compare loan fees, interest rates and total interest expense over the life of the loan in evaluating their financing options.
Potential Limit on Loan Amount
Unlike other green mortgage programs, the PACE Loan Program does not technically apply limits that restrict your loan amount. From a practical standpoint, however, loan amounts are limited by the amount of equity you have in your home. Assuming you have sufficient equity, home owners are usually able to borrow approximately 15% of a home's value with a PACE loan. Other financing options such as a home equity loan loan or green mortgage program may enable you to obtain larger loans to pay for energy efficiency home improvements. Additionally, 100% of PACE loan proceeds must be used for energy efficient upgrades and no loan proceeds can be used for other home renovations plus the borrower cannot take any cash out with a PACE loan.
Potential Prepayment Penalty
Some PACE loans require you to pay a prepayment penalty if you payoff your loan early. Although prepayment penalties are less common for PACE loans that originated after 2017, you should confirm that your loan does not include one. The lender is required to disclose if your loan includes a prepayment penalty and you should ask the lender to remove it before you sign loan documents or consider working with a different lender. Other financing options such as a mortgage, home equity loan or HELOC may not include a prepayment penalty so this is an important point to consider when you evaluate a PACE loan.
More FREEandCLEAR Resources
PACE Loan Program Guide
Review our comprehensive overview of the PACE Loan Program including borrower qualification requirements and other important program information such as property eligibility, energy efficiency improvement project guidelines and loan limits.
Mortgage Rates
Use our mortgage rate tables to compare updated interest rates and fees for lenders in your area. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Summary of Energy Efficient Mortgage (EEM) and Green Mortgage Programs
Review and compare important program features and eligibility requirements for multiple energy efficient mortgage (EEM) and green mortgage programs so that you can select the mortgage option that is right for you.
Sources
"B5-3.4-01, Property Assessed Clean Energy Loans." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.