PACE loans are being touted across the country and recently here in Florida as a great way to retrofit your home with energy and cost saving technology. You can get a low-interest, no-money-down loan using the equity in your home to install solar panels, better HVAC systems and more. Wonderful! But wait…. there is a catch!
At the website https://www.floridapace.gov/ we learn that PACE stands for Property Assessed Clean Energy. Property Assessed translates to property lien. Homeowners with an FHA backed mortgage should take note of this. In 2014, the FHA “made clear that Fannie Mae and Freddie Mac’s policies prohibit them from purchasing a mortgage where the property is subject to a first lien PACE Assessment.” This means that you may be required to prepay the loan in full before refinancing or selling your home. Oh, did I mention that there may a prepayment penalty?
Since the criteria to qualify for this loan is based on home equity, a borrower’s ability to repay the loan is not considered. Credit check, income verification, debt disclosure: not part of the application process. It is up to the homeowner to determine if they can afford this extra payment. Unfortunately, these loan conditions are appealing to those on a fixed or limited income. These homeowners can be forced into foreclosure when the tax lien assessment makes the mortgage payment too much.
I spoke to a homeowner who had considered a PACE loan but found she could get better financing terms through traditional methods. She qualified for a home equity line of credit and the bank did their due diligence to ensure the credit could be paid back. She said the financing rate was much better than the PACE loan proposed as well.
Investors in PACE loans are the real winners here. Since the loan repayment is a tax lien, investors are guaranteed a return on their investment.
As the Florida Pace Funding Agency’s Consumer Protection Policies states: “Without PACE programs, many homeowners would have no, or costlier, access to Qualifying Improvements.” They also caution that “The amount of the tax lien certificate is the sum of the unpaid real estate taxes and non-ad valorem assessments, penalties, advertising costs and fees. As a result of this process there is a significant risk that you may ultimately lose title to your property if you do not pay the
So, bottom line – we have to be smart consumers. Know your budget, understand loan terms and make sure you don’t get yourself into an unsustainable situation when looking to make your home more sustainable.