If you live in California, you may have already seen ads for HERO financing for solar panels and other green upgrades. HERO, Ygrene, and CaliforniaFirst are PACE Financing programs. PACE Financing is a popular way for homeowners to make energy efficient home upgrades with clean energy and water conservation improvements. Qualification is easier than a bank loan, and contractors can handle most of the paperwork for you.
While the PACE financing is easy to access, there are things you should know first. Critics argue that PACE financing companies aren’t being upfront about the costs and consequences of PACE financing. The costs come in processing fees and high interest rates. The consequences can happen when you go to sell or refinance your home. It can be very difficult to sell or even refinance a home with PACE financing.
Here’s how PACE financing works, how much it costs, how to qualify for PACE, and how to refinance or sell your home before you have paid off your PACE lien. I have also included steps to apply for PACE financing, and alternatives to PACE. You can also read my article about other ways to finance energy efficient upgrades.
What is PACE Financing?
PACE stands for Property Assessed Clean Energy. The funding comes from bond issues sold to private investors. Repayment is in the form of a lien on your property taxes. PACE financing is technically a property tax assessment, instead of a loan.
The amount that can be financed through PACE is limited to 15% of the market value of the property up to $700,000, and 10% after that. The repayment period is between five and 20 years, depending on the upgrades. The combined assessment for PACE and property taxes cannot be more than 5% of the market value of the property at the time the improvement is done.
PACE financing can be used for a variety of energy efficient home upgrades, such as:
- Solar photovoltaic systems (panels and inverters)
- Solar thermal systems (water heating and pool heating)
- Electric vehicle charging stations
- Small wind turbines
- Stationary fuel cell power systems
- High-efficiency HVAC systems
- Energy-efficient appliances
- Energy-efficient windows, doors, skylights
- High-efficiency water heating
- Sealing and insulation
- High-efficiency pool equipment
- High-efficiency lighting
- Indoor water efficiency (toilets, faucets, showerheads, sprinklers, drip irrigation)
- Outdoor water efficiency (rainwater catchment, grey water, drought-tolerant landscaping)
2019 UPDATE: new law SB-465 allows PACE liens to cover wildfire safety improvements.
In California, three statewide entities who administer PACE are HERO, Ygrene, and California First. There are other smaller PACE entities. HERO, which is headquartered in San Diego, administers 90% of all residential PACE projects nationwide.
How Much Does PACE Financing Cost?
Even though they offer 100% financing with no down payment, PACE financing programs charge origination fees and interest. The interest rates vary between 4.75% and 9%. The origination fee can cost up to 7% of the borrowed amount. Here are some examples:
- The HERO program normally charges a 4.99% origination fee, a $95 recording fee, and $35 tax roll fee.
- Ygrene charges a 3% origination fee, plus upfront program fees. The program fees vary from County to County, and usually range from $794-$844.
- CaliforniaFirst fees vary, based on county, and the type and cost of the project. For a $20,000 solar installation in San Diego County, with a 20-year payback term, CaliforniaFirst charges a 6% origination fee, $1280 program fee, $90 recording fee, and $52.99 reserve fund fee. The interest rate for this project is 8.29%.
Qualify for PACE Financing
Qualifying for PACE financing is much easier than for a traditional home equity loan. There is no credit check. Homeowners must be current on property taxes, and have no judgments or tax liens, no current bankruptcies, and no delinquencies on their existing mortgage. The mortgage and assessment amount can total no more than 90% of the property’s current value.
Selling or Refinancing Your Home with PACE Financing
Selling or refinancing your home with a PACE lien can be tricky, if not impossible. Some PACE providers make misleading claims that loan transferability is easy. Currently, lenders are usually unwilling to finance or refinance mortgages on properties with PACE financing.
PACE Financing is a Super Priority Lien
Because of their status as a tax lien, PACE assessments become Super Priority Liens. This means that they take a higher position than a property’s first mortgage. Lenders don’t want to finance a property with a lien that is superior to their mortgage. If you have a conforming loan, Fannie Mae and Freddie Mac forbid you to take on a PACE lien without their consent. New PACE liens violate their loan terms.
This is why it’s either difficult or impossible to sell a home with a PACE assessment. Lenders won’t finance a home with a super priority lien. This is why it’s also difficult or impossible to refinance your home if you have a PACE lien. In 2014, FHFA, which is the supervising agency for Fannie Mae and Freddie Mac, announced that it would not allow purchases of loans in the secondary mortgage market on homes with PACE liens, if they assume super-priority status.
Lenders and PACE administrators are still working out an arrangement to make home sales possible. HERO has offered to subordinate the assessment to a new deed of trust, charging a $350 subordination transaction fee. However, this offer of subordination has not been accepted by the FHFA.
A lien is a material fact, so sellers must disclose it to potential buyers. The buyer has the right to review the terms of the lien, and refuse to take on the lien, even is he or she qualifies for it.
In many cases, a home seller will need to pay off the PACE assessment before selling the home.
FHA Home Buyers
Things might be changing for FHA borrowers. On August 24, 2015, the Department of Housing and Urban Development (HUD) announced that it will soon publish guidelines for FHA financing on properties with PACE liens. They may make it possible for borrowers to purchase homes with existing PACE liens. The FHA guidelines will require the subordination of PACE lien financing to the FHA first mortgage.
Apply for PACE Financing
To get started, you can go to a program website and begin your application. A contractor can also help you with the application. Here are links to the three main companies in California:
Here is an example of the process:
- Homeowner is advised to get an energy audit.
- Homeowner contacts an approved licensed contractor.
- The contractor gives an estimate for the improvement.
- Either homeowner or contractor applies to the program for funding.
- The contractor completes the work.
- The PACE entity pays the contractor.
- The homeowner has a property tax assessment for the duration of the repayment period, plus interest and fees.
Other Ways to Finance Energy Efficient Home Upgrades
There are many ways to finance energy improvements. Read my article about 7 Ways to Finance Energy Efficient Upgrades for Your Home.
Consider all of your options before choosing a program. For some energy improvements, such as solar panel systems, you can also choose to lease. (Leasing solar power systems can be much more expensive than buying, however. You can read more about that in my Solar Power Basics article.)
Here are three programs that are used to finance energy efficient home upgrades in San Diego County.
Energy Efficient Mortgages (EEMs)
Energy Efficient Mortgages are a way to finance improvements when you buy your home. Read about CalHFA Energy Efficient Mortgages, which offer generous grants to help fund improvements. Fannie Mae also offers a conventional Energy Efficient Mortgage, and the Veteran’s Administration offers an Energy Efficient Mortgage for active military and veterans.
Renovation Loans
Renovation loans are one of real estate’s best-kept secrets. In my article about Renovation Loans, I describe the different programs to choose from. Renovation loans can be used when you buy or refinance a home.
Home Equity Line of Credit (HELOC)
Also called a second mortgage, a Home Equity Line of Credit (HELOC) can also finance energy efficient home upgrades.
The Bottom Line
PACE financing is becoming popular in Southern California. It is attractive because it’s easy to qualify, and the payments are in the property tax bill. The costs of PACE financing are usually offset by energy savings. However, the programs are relatively expensive, and having another lien on your property can mean big trouble when you go to sell or refinance your home.
There is some controversy regarding PACE financing. Many argue that homeowners don’t receive enough information about the risks of taking on PACE financing. Some claim there is inadequate consumer protection standards for disclosure and transparency of consumer lending. Potential pitfalls, such as being unable to sell or refinance your home, may not seem obvious until later. Also, the full cost of financing is not always clearly explained to homeowners. While the improvements may increase a property’s value, the existence of a PACE lien may negate that increase.
If you are planning on keeping your home for the duration of repayment, and have no plans to refinance during that time, then PACE financing might be the right choice. Be sure to consider all terms (interest rates and fees) before making a decision.
Any questions about funding energy improvements, call me at (760) 637-7231, or send me a message.
