What You Need to Know About PACE Loans

Family in front of home bought with a PACE Loan

Sunny locales like California, Texas, and Florida are known for their summer-like weather all year, including lots of extra sunshine. It makes these states perfect places for solar panels and other energy-efficiency upgrades, but financing these items can be difficult due to the high initial cost and upfront investments. That’s why the state of California started the BerkeleyFIRST climate program in 2008, which was effectively the first legislation passed that launched the Property Assessed Clean Energy program.

Since then, PACE loans have had a rocky road. Fannie Mae and Freddie Mac refused to back mortgages that had a PACE lien starting in 2010, then FHA followed suit at the beginning of 2018.

What’s the deal with PACE anyway?  

An Intro to PACE Loans

Although PACE loans are currently available in 35 states and the District of Columbia, an area that’s populated by about 80 percent of the people in the US, these loans are still not all that common when compared to other home-equity based programs. PACE loans are meant to be home equity types of loan products used to cover energy-efficiency upgrades to homes, so they’re primarily utilized for big-budget items like solar panels, tankless water heaters, HVAC upgrades, and new window and door installation. Sounds pretty awesome, right?

They get even better when a potential PACE-borrower finds out that they don’t have to pay anything upfront to get all of this work done to their home, plus they won’t usually have to make any sort of payment for months. This is like a dream come true!  So why are Fannie, Freddie and FHA refusing to work with this program?

PACE and Consumer Protection

PACE has two major problems that have made the program difficult to swallow for many people. First, the program is often offered door-to-door by overly aggressive contractors looking for work to do in neighborhoods that could stand some upgrades.

Read: that solar panel hawker in your neighborhood isn’t just annoying you four times a day, he’s also bugging your neighbors any time the curtains shimmy. And because of his high pressure sales tactics and promise of no money down, he’s going to get a few jobs out of the deal.

This has caused more than a few people to get into loans they didn’t understand and purchase upgrades that they didn’t need.

The other big problem with PACE is that people don’t bother to read the fine print. They just hear “no money down” and “payments won’t start for months.” While both are technically true, the real truth is that PACE isn’t a standard type of loan. Instead of offering financing terms, like 60 payments of $130 each month, the outstanding debt becomes a tax assessment.

Financing home repairs as a tax assessment is generally not in your best interest, for several reasons, including:

The debt can stay with the property.

There are two kinds of real estate debt. There’s debt that’s secured by the property, which means the bank will sell the house and it’ll pay off the mortgage. Then, there’s debt that stays with the property. This sort of debt isn’t erased when the house is sold again unless the lienholder says it is.

In the case of PACE, the next homeowner will often be obligated to pay the bill for the upgrades they’re now enjoying. This makes your house difficult or impossible to sell when someone else sees that your tax assessment is ten times the neighbor’s.

If you don’t pay your new tax bill, you’ll lose your house.

Tax assessments take the first position nearly always when there’s a foreclosure to be had. You don’t even have to miss a mortgage payment to lose your house to a tax sale. If you don’t pay your taxes for a certain number of years (this varies by area), you’re going to get a notice that it’s being sold on the courthouse steps for the back taxes.

Since PACE is implemented as a tax assessment, it’s going to be able to force you out of your house if you can’t make the payments.

No one wants to be subordinate to taxes.

Perhaps most importantly, it’s very, very difficult to refinance your home with a PACE lien on it. Fannie, Freddie, USDA, and FHA won’t touch you without making you jump through plenty of hoops. If you can’t get out from underneath it, you can’t sell that house to anyone but a cash buyer. There are some ways to refinance PACE liens into a standard mortgage type, but they’re not easy to do.

There have been numerous complaints from groups like the National Consumer Law Center, the Mortgage Bankers Association, the American Bankers Association, the Appraisal Institute and the National Association of Realtors that state that PACE represents a serious risk to the average American homeowner. Now, that being said…

There is a Place for PACE

Though there are countless stories of elderly people in particular who have been taken advantage of by unscrupulous contractors using PACE as a means to an end, the truth is that PACE can be useful for some homeowners.

PACE could be right for you if you’re:

  • Meticulous about the details. You read everything, even the tiny print, before you sign anything. You also ask lots of questions and possibly get an audio recording of the person doing the selling of the thing you’re buying.

  • Realistic about your potential to pay off a loan. PACE loans are tricky because they can be spread over so many years that it feels like you’ll definitely be able to pay them off. But unless you actually crunch the numbers, don’t assume you’ll have no problem with the payments.

  • Willing to stay in your home until your PACE lien is covered. If you’re in the home you think you’ll die in, or at least hang out in until your PACE lien is paid off, then this could be a program for you. Selling or refinancing with a PACE lien on your public record can be extremely difficult, so you need to be in it for the long haul.

  • Willing to learn and understand more about how tax assessments and liens work. Do your homework, because you can’t rely on assumptions with stuff like this. Know your rights and responsibilities when it comes to a tax lien.

  • Great at keeping detailed records. You’ll need to prove that you’ve paid each and every tax payment since your PACE lien.

PACE: It’s Not Just Another Salsa on the Market Shelf

PACE loans can be fraught with danger (unlike Pace salsa, which is fraught with tomatoes), but if you’re smart and meticulous, you can use this program to do exactly what it was made for: to improve your home’s energy efficiency without totally breaking the bank. We’d love to talk to you more about PACE loans (or salsa). If you’re burning to learn more, contact us here. We’re about to send Tina the Intern out to get some tortilla chips, it’ll be a party!