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Home Energy Upgrade Loans, What's the catch?

Posted by: kateg 3 years, 10 months ago


After closing escrow, new homeowners are often inundated with mail ranging from big-box store coupons to scammers trying to cheat money from unsuspecting homeowners.  One item that we find clients often intrigued by, are loans for home energy upgrades.


One example of this type of loan is a PACE Loan, or Property Assessed Clean Energy loans.  Also known as HERO loans (Home Energy Renovation Opportunity), these loans are marketed to homeowners as a quick and easy way to finance energy saving updates to your home like solar panels, updated HVAC, or new energy efficient windows.  Since new homeowners have just spent their savings on a downpayment, they’re often intrigued by the opportunity to quickly renovate outdated systems in their home.  However, what they don’t realize, is they could be setting themselves up for disaster when it comes time to sell.


The PACE Loan website describes the loan as adding value to real estate: “Property owners across the US are using PACE because it saves them money and makes their buildings more valuable. PACE pays for 100% of a project’s costs and is repaid for up to 20 years with an assessment added to the property’s tax bill. PACE financing stays with the building upon sale and is easy to share with tenants. State and local governments sponsor PACE financing to create jobs, promote economic development, and protect the environment.”  Sounds great, right?  Wrong.


While there are multiple issues with this type of loan, the biggest problem is in the structure of the loan.  A PACE Loan is a super-lien, as it is placed on the property’s tax bill, ahead of a mortgage or deed of trust.  In the example above, the PACE loan advertises itself as “financing (that) stays with the building upon sale”.  However, mortgage lenders won’t voluntarily subordinate their position to a home renovation loan.  


Therefore, let’s say that a homeowner unexpectedly needs to sell the property while the PACE loan is still outstanding.  A future buyer, who would likely need a loan to purchase the property, may be unable to obtain a loan because of the outstanding super-lien.  


That would leave 3 options:

  1. Seller pays off the outstanding loan balance on the PACE loan,

  2. Buyer pays for the outstanding loan balance on the PACE loan, if their lender will allow it,

  3. Or, Only sell the house to someone who is paying cash, whereby substantially limiting the Buyer pool


Unfortunately, none of the items above are ideal when trying to sell a property, and anytime you have complications when selling a home, the value can be negatively impacted.

Therefore, it is our recommendation that you research as much information as possible prior to signing up for a PACE or HERO Loan, and if you have specific questions, never hesitate to contact Kate at (619) 933-5319.



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