What You Must Know About PACE Financing
With so much misinformation floating around, many homeowners wonder whether the Property Assessed Clean Energy (PACE) program is a legitimate option for home improvement financing or merely another scheme.
Simply put, PACE financing enables homeowners to use a portion of their home equity to pay for home upgrades related to energy-efficiency, renewable energy, water conservation, and safety measures. Unlike traditional financing methods, PACE financing is collateral-based, which means that the homeowner’s credit score has no bearing on their qualification.
If you or someone you know is considering this option to finance eligible home improvements, read on to learn more about the PACE financing program.
PACE financing has some of the most robust consumer protections in the lending industry
The residential PACE program (known as R-PACE) was authorized over a decade ago. Since then, the program has evolved significantly over the years to incorporate consumer safeguards and protections to help homeowners.
Today, the residential PACE program has consumer protections not found in traditional financing. For example, in a traditional financing transaction the lender issues the financing to the homeowner who is then responsible for paying the contractor directly.
With PACE, the funds are not disbursed to the contractor until the project is completed and the homeowner signs off the completion certificate. The completion certificate indicates not only that the project was completed but that it was also completed in a workmanship like manner.
Additionally, Renew Financial has a temporary hardship assistance program to ensure that a payment owed on a PACE assessment does not stop qualified homeowners from getting back on their feet.
PACE financing is based on a program that has been around for over 100 years
The PACE program is an extension of the land-secured financing districts, also called special assessment districts. Land-secured financing districts have been used in the United States for more than 100 years to pay for infrastructure improvements deemed to be in the public interest.
PACE financing allows state and local governments to extend the use of land-secured financing districts to fund energy-efficient and safety related home improvements on private property. It is important to note the PACE program is not a government-imposed tax, loan, or subsidy. Participation in the program is 100% voluntary.
Homeowners located in participating communities who use PACE to finance home improvements agree to a voluntary tax assessment on their property that will only be removed once the financed amount is paid back in full.
Home improvements financed with PACE can help reduce energy consumption
According to the U.S. Department of Energy as much as half of the energy used in a home goes to heating and cooling. Heating and cooling a home uses more energy than any other system in a home. Therefore, updating an old heating, ventilating, and air conditioning (HVAC) system is a smart decision as it can have a big effect on reducing energy consumption, savings on utility bills, and added comfort.
The U.S. Department of Energy recommends that in order to get the maximum energy savings, a homeowner should combine equipment upgrades with appropriate insulation, air sealing, and thermostat settings. In doing so a homeowner can potentially cut their energy consumption for heating and cooling alone from 20% to 50%.
A home improvement financed with PACE could increase the value of your home
A data-supported analysis conducted by the Journal of Structured Finance indicates that PACE has a positive impact on home sales. The study found that when comparing PACE with non-PACE homes, the home improvements financed through PACE generally increased the home value by at least as much as their costs (compared to only 60% for other types of home improvements). What this means is that PACE finaning has proven to have a net positive impact in the housing market by increasing the value of the home.
Additionally, according to a research study conducted by the Institute of Market Transformation (IMT), homes that have an energy-efficiency improvement have a substantial and significant reduction in the default risks. Homeowners that invested in energy- efficiency improvements were about one-third less likely to default than those who did not.
PACE financing is attractive to a broad group of consumers
PACE financing is not contingent solely on an individual’s credit score which makes it an attractive and popular choice for long-term financing for energy-efficient or safety related home improvements to a wider range of consumers.
While most energy-efficient or safety related home improvements can be financed through non-secured loans, personal loans, a home equity loan, a Home Equity Line of Credit (HELOC), or other traditional property-secured loan. PACE financing allows homeowners who do not fit in the box of traditional financing underwriting standards to get 100% funding to complete the PACE eligible home upgrades they need or want, without any upfront money out-of-pocket.
PACE financing is available for hundreds of home improvement projects and products
PACE financing was created with one goal in mind – to bringing to market an affordable home improvement financing option that allowed all homeowners, even those who did not fit in the box for traditional financing options, to finance their eligible home improvement projects with a competitive fixed interest rate and long-repayment terms. Today, homeowners can use the PACE program to finance hundreds of projects and products, including but not limited to:
- Windows and doors
- Heating, ventilation, and air conditioner (HVAC)
- Earthquake protection
- Solar panels
- Water heaters
PACE looks at a number of factors around the homeowner’s ability to pay for the improvement
Renew Financial reviews important risk information and factors such as the homeowner’s mortgage payment, property tax payment, and bankruptcy history; loan-to-value (LTV); combined loan-to-value (CLTV); and income to determine if the applicant qualifies for PACE financing and for how much.
In conclusion, PACE financing offers many benefits that traditional financing options may not offer. However, just as with any other financial product PACE financing is not a one-size fits all solution and may not work for everyone or in every situation. PACE financing may prove to be a good solution for homeowners who are looking to finance eligible home improvements with long repayment terms and a competitive fixed interest rate.