I am considering a PACE loan for home improvements. What should I keep in mind before signing up?
PACE loans may have certain benefits, but it can put you at risk of losing your home if you cannot afford the payments. Understand the risks before signing up.
If a salesperson or contractor offers you a PACE loan to finance a home repair or an energy-efficient improvement, it is important to understand the benefits and risks involved before you sign up. You may have other ways to finance your upgrades, so it is important to shop around.
PACE loans may require no down payment, which can be helpful if you have necessary repairs and are cash-strapped. However, PACE loans have fees and interest you will have to pay over time, just like a normal loan.
You will have to make payments for PACE loans through your property taxes- and it will make your property tax bill go up. For some homeowners, the increase can be large. This could also put you at risk of losing your home through a tax sale. Some of the risks include:
You pay your PACE loan back plus interest and fees with your property taxes each year until it is paid off. You may have to repay the PACE loan for five, 10, or 20 years. This can lead to high assessments added to your property tax bill. You should pay attention to how long the PACE loan will last— it may be longer or shorter than other types of loans, which can affect the size of your payments.
If you have a mortgage, your mortgage company will treat PACE loans like your property taxes, because your PACE payment is billed as part of your property tax payment. So, if your home goes to tax sale, any portion of your PACE loan that is delinquent will be paid before your mortgage company will be paid anything. If you have an existing mortgage escrow account that collects your tax and insurance payments, most mortgage servicers will add your PACE payments into your mortgage escrow, to make sure that they are paid timely. This would cause your mortgage payments to rise. Most lenders will not refinance your mortgage or give you a new mortgage if you have an outstanding PACE loan.
If you don’t have an escrow account to collect property tax payments, you will need to save up on your own to make PACE payments along with your property taxes.
Salespeople may tell you— but are not required to prove— that the proposed improvements “pay for themselves” in lower utility payments or other rebates. For some projects funded through PACE, these statements may not be true.
Limited means to dispute the work or costs once you sign up
Because you pay PACE loans back with your property taxes, you may have limited options if you aren’t satisfied with the work, wish to dispute the charges, or can’t afford the payments. If you don't have a mortgage loan that collects your property tax payments, you may have to work with the local taxing authority if you fall behind. They may not be able to help you beyond offering you a short-term payment plan, which may not be affordable.
Trouble selling or refinancing your home
If you want to sell your home before the PACE loan is paid off, you might face challenges completing the sale. When you sell your house, the buyer is responsible for continuing the PACE payments. Any buyer will face the same risks of losing the home if the payments are not made. That may make the home more expensive than buying another home without a PACE loan. Most lenders will not make a mortgage to the buyer when there is a PACE loan on the house. In addition, most lenders will not refinance your mortgage if there is a PACE loan on the house. This may limit the number of buyers who will be willing to purchase your home if you cannot afford to pay the PACE loan off.
Loss of home equity
If your home goes to tax sale, the tax authority will collect any unpaid taxes and any delinquent PACE payments, along with any penalties. This can take a large chunk of any equity in the home. Which means there will be less for you to use on other expenses, for example, if you are planning to use that equity to pay the costs of moving out of the home, or for retirement.
Before deciding to sign up for a PACE loan, shop around for other options. If you have an estimate, shop around for contractors and loan options.