As more homeowners become climate conscious, programs to support the use of renewable energy sources have become more popular. The Property Assessed Clean Energy (PACE) loan is a tool homeowners can use to finance the installation of energy efficient upgrades, but Realtors say this type of financing has some very real risks.
A PACE loan allows a homeowner to borrow money to finance energy efficiency upgrades, such as adding insulation, installing double-pane windows or solar panels, artificial turf, and other energy and water saving upgrades. The debt is tied to the property, not the individual homeowner, and repaid through an assessment added to the annual or semi-annual property tax bill. The loans are repaid over time, for as long as 20 years.
There are no credit requirements for a PACE loan, only that homeowners must have at least 10 percent equity in their home to qualify and they must be current on their mortgage and taxes. Since the loan stays with the property, it is transferred to the new property owner upon purchase. The loan then becomes the responsibility of the new owner.
There are some downsides and hidden risks to this program that should concern every homeowner, according to Karen Trolan, president of the Silicon Valley Association of REALTORS®.
"Since the PACE limits are very generous, a PACE loan borrower may end up borrowing more money than they can recoup in the purchase price. For example, the owner of a $400,000 home could borrow up to $60,000 on their home. Caution is needed to avoid overleveraging your home with a PACE lien," said Trolan. "Like a mortgage, the PACE lien comes out of your equity. Paying off a PACE lien will reduce the amount you can realize should you decide to sell your home in the future."
Trolan noted homeowners with a PACE loan may not be able to refinance their mortgage with a conventional mortgage. Fannie Mae and Freddie Mac are prohibited from purchasing mortgages with PACE liens on them because as tax liens, they put lenders in a secondary position if the loan cannot be repaid.
Moreover, home sellers with PACE liens may have a hard time finding potential buyers for their home. "Since Fannie Mae and Freddie Mac will not approve mortgages for properties with an existing PACE lien, conventional buyers will not be able to purchase your property unless the lien is paid off before the close of escrow. This will limit your buyer pool to all-cash and nonconventional buyers. Worse, you will likely have to pay off the lien in order to sell the property to a buyer who wants to obtain conventional financing," explained Trolan.
Other disadvantages of PACE loans are the interest rates and costs are generally higher than mortgage loans and PACE programs are not subject to the same Truth in Lending/RESPA disclosures required of residential mortgage lenders. This means consumers need to be extra diligent about understanding the terms of their financing. The best practice is full disclosure and speaking with the mortgage holder.
Realtors are worried consumers can be tempted by the low monthly payments which may even be completely offset by energy and water bill savings and overlook the high cost of some PACE financing. The California Association of REALTORS® is currently examining whether they should sponsor legislation that regulates PACE loans.
"Are the risks and pitfalls associated with PACE liens worth it? That's a question that homeowners must answer for themselves. As Realtors, we feel it is our duty to inform our clients and make them aware of our concerns about the program," said Trolan.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.