A PACE loan is a form of home renovation financing that originated in California. Loans for residential properties are currently offered in three states – California, Florida and Missouri. However, the program has a far greater reach for commercial properties, with availability in the District of Columbia and more than 36 states.
Home Renovation Loans
What is a Property Assessed Clean Energy (PACE) Loan?
The U.S. Department of Energy regulates the PACE loan program. Loans are funded through municipal bonds. The proceeds can be used to cover the cost of renewable energy improvements or energy-efficient upgrades on residential and commercial properties.
Upgrades that can be covered under PACE Loans include:
- Air conditioning units
- Doors and windows
- Duct upgrades
- Energy-efficient appliances
- Heat pumps
- LED lighting
- Solar panels
How Does a PACE Loan Work?
When you take out a PACE Loan, it attaches to the property. Therefore, payment is not remitted in monthly installments but through annual property assessments when you pay your property taxes.
If you decide to sell the home, you’re not required to pay the balance off since it follows the property. However, it could be challenging to find a buyer since many mortgage lenders won’t finance a property with a PACE loan attached to it.
Below is a step-by-step breakdown of how the PACE Loan process works:
- Step 1: Apply for a PACE loan.
- Step 2: Identify a contractor that’s willing to work with you. Payment is only remitted once the work is complete, making it challenging to find a contractor since most are used to being paid in installments as project milestones are complete.
- Step 3: Remit payment through property assessments until the loan is paid off or you sell your home.
PACE Loans Typical Terms and Rates
Most PACE Loans are payable over a 10 to 20-year period, and you’re permitted to borrow up to 15 percent of your home’s value. However, your loan-to-value ratio cannot be greater than 97 percent.
You’ll pay between 4 and 9 percent in interest, along with closing costs of around 6 percent of the total loan amount. However, prepayment penalties aren’t common with PACE Loans unless they were originated before 2017.
How to Qualify for a PACE Loan
Several factors play a role in determining if you qualify for a PACE loan, including:
- The payment history on your current home loan
- The amount of equity you have in your home
- Your earnings and if they’re sufficient to cover the property assessment used to repay the PACE Loan
Home Renovation Loans
Advantages and Disadvantages of PACE Loans
- No down payment requirement
- Perfect credit is not needed to secure a loan
- No monthly loan payments
- Potential savings on energy costs
- Tax-deductible interest payments (in some cases)
- Steep loan set-up fees
- Higher interest rates
- A loan payoff could be required to refinance your home
- Potential challenges when selling the property
Alternatives to PACE Loans
You can take out a RenoFi Loan to cover the cost of energy efficiency improvements. Unlike PACE Loans, they assume the second position behind your primary mortgage. You’re permitted to borrow up to 90 percent of your home’s projected after-renovation value.
RenoFi partners with credit unions nationwide to offer competitive rates on refinance loans. Below are the loan options available to you:
- RenoFi Home Equity Loan and HELOC: You’ll get access to a line of credit between $25,000 and $500,000 at closing. Both fixed and variable interest rates are available, and the draw period extends 10 years, followed by a repayment period of 20 years. Even better, you won’t have to refinance your existing mortgage to qualify for this loan product.
- Reno Refi Loan: Refinance your existing mortgage and pull equity out of your home to cover the cost of renovations. Mortgages are limited to $2,000,000 or 80 percent of your home’s after renovation value, and you’ll get a loan term of up to 30 years.
To apply for a RenoFi Loan, visit the website and use the pre-qualify tool to input your information. The lending partners in RenoFi’s network will evaluate your income, credit rating, and renovation plans to determine if you’re a good match for a loan product. If so, you’ll be presented with loan offers and can work with a dedicated RenoFi Advisor to select the best fit.
If you aren’t quite ready to apply for a loan, use the RenoFi Loan Calculator found on the website to gauge your borrowing power. You can also connect with an advisor using the online chat function or schedule a call to speak with a member of the RenoFi team.