Property Assessed Clean Energy Programs (PACE) Loans

Written by Samantha CatheyUpdated: 21st Apr 2022
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As the world slowly phases out nonrenewable energy sources, we must upgrade our homes and commercial buildings to heed the existential crisis of climate change. Unfortunately, it is usually an expensive venture that requires upfront capital. Enter the Property Assessed Clean Energy (PACE) loan.

What Is a Property Assessed Clean Energy (PACE) Loan?

A Property Assessed Clean Energy loan, more easily called PACE, is a low-cost financing program that helps make energy-efficient and renewable energy upgrades to residential and commercial properties, known as R-PACE and C-PACE, respectively. Overseen by the U.S. Department of Energy, more than $2 billion in energy efficiency projects have happened on commercial properties across the country.

Here’s a list of some eligible improvements and upgrades for energy efficiency and renewable energy:

  • HVAC system
  • Building insulation
  • Water conservation
  • Roof replacement
  • Lighting upgrades
  • Low-flow toilets
  • Weather sealing
  • EV charging stations
  • Solar panel
  • Energy Star doors, windows, appliances
  • Drought-resistant landscaping
  • Hurricane and seismic resiliency

How Does PACE Financing Work?

Enabled through state legislation and used locally, PACE loans are attached to a property—not a home and not a homeowner. The property serves as collateral, so the debt doesn’t leave if ownership changes hands. There is no upfront down paymentor monthly payment like a traditional mortgage. Instead, repayments are tacked onto property taxes and paid through an assessment which can be spread out 10 to 20 years typically, but it does depend on the dollar amount financed.

Understanding PACE Loans and Financing

PACE financing stands out most because the loan is tied to the property and is filed with the local municipality as a lien. This encourages property owners to make those necessary improvements even when they believe they won’t stay in a home or building long enough to benefit from the upgrades. It can also be difficult to sell a property if new homeowners don’t want to take on the debt.

The process of gaining financing is straightforward. First, PACE service providers help building owners select the best plans for their property. Applications with qualified projects are processed, and funds are disbursed with 100% upfront financing. After approval, building owners must find a contractor willing to work with a PACE loan, which isn’t always easy as contractors are paid at projection completion, not in installments.

Interest Rates

Interest rates for PACE financing can range from 6% to 10% but usually sit somewhere in the middle. Your property tax bill will increase by thousands of dollars each year for the length of the loan.

PACE Costs and Expenses

Property owners immediately benefit from the upgrades by not having to pay a down payment. They also enjoy a reduced energy bill depending on their upgrades. Unfortunately, there are costly administrative fees, and you may be subject to an early payoff fee.

Easy Qualification

Credit score isn’t a huge factor for PACE funding. Approval is based on the equity in the home, mortgage payment history, and ability to repay. Funding cannot exceed 15% of the property’s value, and the loan-to-value ratio of PACE financing and the balances of any loan associated with the property cannot exceed 97%. Additionally, applicants should have no involuntary liens on the property, and their property taxes must be up to date and in good standing for the past three years.

What States Offer Pace Financing?

There are very few states that have adopted residential PACE financing—California, Missouri, and Florida. But as of 2019, over 200,000 homeowners had made $5 billion in improvements to their homes with financing. Just think how much more could be done if more states adopted residential PACE!

Commercial PACE loans are more common and operate in 28 states. That said, D.C. Legislation to adopt the PACE program is active, so that more states will offer this financing vehicle over time.

What Are the Advantages of PACE Financing?

PACE funding increases resilience to natural disasters and helps communities meet climate change goals and reduce carbon emissions. Other advantages of the program include:

  • Can lower income tax liability and save utility costs.
  • Does not require an upfront down payment.
  • Can improve cash flow for property owners by spreading payments out over many years.
  • Generates local economic activity and jobs.

What Are the Disadvantages of PACE Loans?

PACE financing includes a few exclusions, such as refrigerators, light bulbs, and other portable items. Additionally, they aren’t suitable for investments under $2,500. Here’s a list of other disadvantages to PACE loans:

  • May require high administrative and legal setup costs.
  • Due to having the first lien, residential PACE loans in default were recovered by PACE lenders first, not the mortgage company.
  • Fannie Mae, Freddie Mac, and certain banks do not supply mortgages to homes with a PACE loan attached.
  • Some mortgages companiesdon’t allow adding PACE financing to existing home loans.

Frequently Asked Questions

How Do I Pay Off My PACE Loan?

PACE loans are repaid on the property’s tax bill, just like how we pay for public benefits such as new sidewalks and streetlights through an assessment. Terms can be as long as 30 years but usually range from 10-20 years.

Is PACE Program Legit?

The PACE program is a legitimate, viable option for upgrading your property. Just be aware of the drawbacks and weigh your options. You may consider getting a home equity line of credit which is also based on home equity but could have a lower interest rate.

Can You Pay Off a PACE Loan Early?

Yes, you can pay your loan early by paying the assessment in full. However, whether or not there is a prepayment penalty depends on the lender.

Can You Sell a House with a PACE Loan?

A PACE loan stays with the property, not the building or the homeowner, making selling a home tricky. Buyers need to agree to take on the debt if their mortgage lender allows it. Some banks and private online mortgage lenders will not finance a home with an existing PACE loan attached to the property. A PACE loan must be paid in full before selling the home.

Can You Refinance with a PACE Loan?

Refinancing your mortgage with a PACE loan attached can be complicated since it is a tax lien and must typically be paid in full first, but every situation is different and depends on state laws and lender guidelines.

Bottom Line: Property Assessed Clean Energy (PACE) Loans

These affordable long-term loans are easy to qualify for but have a few key drawbacks to contemplate if you’re considering. Be diligent and take the time to research PACE financing if your state offers it. Talk to your lender about an alternative if it does not.

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Samantha Cathey
Samantha Cathey

Samantha Cathey is a Senior Personal Finance Writer & Product Analyst with years of financial training and industry knowledge. She is a former banker, loan officer and investment advisor before dedicating her energy to helping individuals more creatively, through her writing. Samantha studied at the University of Idaho where she majored in Journalism and Writing. Her areas of expertise are mortgages, credit cards, loans, and investing.