PACE loans help homeowners make clean energy changes to their home. They are an optional loan that provides funding for energy efficient changes, such as windows, insulation, solar panels, and energy efficient utilities. When the loan first started, it took first lien on a property. This meant a higher lien than the mortgage. Most loan providers, including the FHA, would not allow financing on these properties. However, this deterred homeowners from making energy efficient changes to their home. Today, the program has changed slightly, allowing FHA financing on the homes.
How PACE Loans Work
PACE loans provide funding for the energy efficient changes on a home. Rather than becoming a first lien, though, they are now a special assessment. They work much like your property taxes. This takes away the ‘full obligation’ requirement. In other words, if you go into foreclosure, the PACE loan will not take precedence over the FHA loan.
PACE loans structured appropriately will travel with the foreclosed home. They would also travel with a sold home. The obligation for the PACE loan must be made known to anyone considering ownership in the property. It works much the same way as property taxes. Before you buy a home, you find out how much the taxes would cost. It works the same way with the PACE loan. The lender, appraiser, or seller would make you aware of the special assessment on the property that they would be liable to pay.
Paying PACE Loans
The FHA has made its lenders responsible for setting up escrow for PACE payments, just like property taxes and homeowner’s insurance. Your lender would let you know your principal and interest payment based on the rate they quote you. They would also add your annual mortgage insurance payment, which is 0.85% of your loan amount divided by 12. They would also add 1/12th of your property taxes, homeowner’s insurance, and the amortized PACE loan.
While the energy efficient loan would add to your monthly payment, it should be offset in the energy savings you reap. In addition, studies show that energy efficient changes have a positive impact on a home’s value. They usually offset the cost of the loan, giving you a decent return on your investment should you decide to sell the home.
Purchasing and Refinancing With a PACE Loan
The FHA is one of the first programs to step forth and allow both a purchase and refinance of a home with a PACE loan. The largest restriction is that the loan does not have superiority. This will vary based on your location. Some states still make it a priority loan. Others allow it to be a special assessment and get ‘subordinated’ to the mortgage.
If you purchase a home with a PACE loan, you’ll have the payment added onto your loan. Again, appraisers and lenders must be transparent about the fact that the special assessment exists. If you refinance, you already know the payment exists, but can refinance your loan since the energy efficient loan is subordinated.
Because the energy efficient changes can have a positive impact on your property’s value, it could help you if you do refinance the loan. Whether you use the FHA streamline just to get a lower interest rate, or you need a full refinance to tap into your home’s equity, you may benefit from the higher value.
The Major Guidelines
The FHA will allow PACE loans as long as it is very clear that:
- The loan can travel with the property whether a foreclosure or standard sale
- It is treated as a special assessment and not a first lien
- The obligation will never accelerate
- The loan does not limit the transfer of deed to a new buyer
- Everyone is made aware of the loan before transferring the title
The FHA has taken a bold step in allowing the PACE loan alongside FHA financing. This opens more doors for FHA borrowers. It also allows more homeowners to take advantage of energy efficient savings.