5 Things to Know About PACE Loans

Written by Posted On Monday, 30 January 2023 00:00

A PACE loan is advertised as needing no money down, providing a way to finance home improvement projects to facilitate energy efficiency. For example, these loans might be used for projects like a new roof, impact windows, or solar panels.

The following are important things for consumers to know before participating in the program.

1. The Basics

PACE stands for property-assessed clean energy. It’s a way to finance renewable energy and energy-efficient projects on private property. These programs are available not only for residential properties but also for commercial properties.

The core idea between both is the same—PACE programs let owners finance up-front costs of energy-related improvements on their property, and then they pay back the costs over time through a voluntary assessment. A PACE assessment is attached not to the individual but to the property.

You are borrowing money to make specific improvements to your home, but in doing so, you’re increasing your property tax payment.

The financing can be used for hurricane preparedness, solar panel installation, LED lighting upgrades, or energy-efficient roofing.

The property is the collateral.

2. The Government Doesn’t Pay For or Insure Loans

You might learn about a PACE program through contractors working in your community or door-to-door salespeople. The federal government doesn’t insure PACE loans or pay for them.

Certain states approve these lending programs, and the local government runs them, or a private company the local government hires might run them.

As mentioned, you pay your loan through an assessment collected with your property taxes.

While the government doesn’t pay for or insure PACE loans, the U.S. Department of Energy oversees the programs.

3. There’s No Down Payment

PACE loans don’t require an upfront down payment, and there is no monthly payment.

The assessments that are added to your regular property taxes are spread out over a determined time frame, usually between 10 and 20 years, and this time frame is based on how much financing is involved.

If you don’t pay the regular assessments, you will face the penalties that you would for not paying your property taxes otherwise.

There’s no underwriting process like traditional mortgages—you can finance 100% of energy-related improvements. Creditworthiness isn’t a major factor of being approved.

Funding for these loans is usually from municipal bonds.

4. The Advantages

For property owners, you might be able to improve your cash flow since you’re spreading out the repayment terms and not making one large upfront payment. You can also deduct your payments from your income tax liability.

You can save money on your energy bills, depending on the type of project you use the funding for, and of course, you’re creating a more energy-efficient property to reduce your carbon footprint.

5. The Disadvantages

People do have to be careful with PACE loans because there are downsides.

First, you can sell a house with a PACE loan, but it’s attached to the property. A buyer will then inherit the loan from the seller, which might make your home less appealing to buyers if you plan to sell or complicate things.

It can also be complicated to refinance if you have a PACE loan. These are tax liens, and you have to pay them first. If you want to refinance your mortgage, you have to pay the lien in full before you can do so. A conventional mortgage loan might not let you refinance if you have a PACE loan unless you pay it off. There may be lenders who will allow you to refinance but only with the condition that you pay your PACE loan with your proceeds.

Finally, you have to read the fine print because interest rates can be higher than average on a PACE loan.

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