In the real estate field, we have come across more and more homeowners that have succumbed to PACE financing for upgrades in their home. When utilizing the PACE financing, it must upgrade an item that will change the energy efficiency levels in the house. The most common uses for PACE financing are roof replacement, HVAC replacement (air conditioning/heating), and window replacement. Other items can are considered if they harness renewable energy (solar panels), conserve water, or protect the home against storms.
PACE financing is a way for a homeowner to acquire an energy-efficient upgrade without any money down. The program provides the funds for the upgrade, and the homeowner then pays the program back over time. The financing is attached to the property and repaid through the property tax bill; thus, the ‘loan’ becomes a property assessment instead of an actual loan.
PACE financing is a way for a homeowner to acquire an energy-efficient upgrade without any money down. The program provides the funds for the upgrade, and the homeowner then pays the program back over time.
The financing is attached to the property and repaid through the property tax bill; thus, the ‘loan’ becomes a property assessment instead of an actual loan.
It all starts with a knock at the door and some pleasant salesperson telling a homeowner that they can get a new one or a new one for no cost out of pocket. Often, a homeowner may need a new roof or air conditioning system and not have the funds to buy it outright, so the PACE option sounds like a great deal. However, we have found that most homeowners do not completely understand the program and how it will impact their home’s value.
The actual cost of the upgrade seems inflated in most cases. In our experience, we find that any item appears to cost about $1000 more than it would otherwise. There are also other fees applied to the assessment, such as a program fee and capitalized interest. The interest rate applied to the evaluation is a bit inflated and not as high as a credit card but close.
With this loan type, an upgrade can have up to 30-year finance. Usually, the amount of time an item can be financed compares to the life of the upgrade in the home. For example, using PACE financing for a new air conditioning system would likely result in a 10-year charge. Whereas using PACE financing for a new roof could result in a 20-year charge. Unfortunately, this means you will be paying for something right up until it likely needs replacing again.
Now comes the money part. When it shows “no money out of pocket,” it means you do not have to write a check right then. But you will be paying for the assessment on your tax bill. You can expect to see a significant rise in your monthly mortgage payment because of the evaluation. A new roof can reduce your homeowner’s insurance costs, and a new HVAC or new windows can reduce your utility bills which could offset some of the costs. Still, you have an assessment that will hit your wallet every month for many years with the PACE financing option.
In a nutshell, our team believes the PACE financing option is NOT worth considering, even if you plan to reside in your home for many years. If you think you might sell your home soon, finding a Buyer willing to take over the assessment will be difficult. There is no value to a new air conditioner if, for example, you owe $10,000 on it.
The first thing a buyer will notice is how inflated your tax bill is. Why are your home’s taxes so much higher than the other five homes in the neighborhood that sold recently? Once the Buyer and/or their Buyer Agent find out there is an assessment on the home, they will either demand it be paid off at closing or devalue your home for an equal amount to the debt.
If the PACE financing option is a homeowner’s only option to replace a broken system, keep in mind that you must be prepared to pay off the PACE assessment when you sell your home, which will immediately impact your equity. It pays to have a Real Estate Agent you trust help you to understand what equity you have in your home and how the PACE assessment will balance against future equity growth.