The high costs of adding solar power or replacing a roof or air conditioner don’t have to be paid with a credit card or pulling money out of savings, as 76 percent of Americans do when financing home improvements. Many homeowners use home equity loans to pay for green energy and related work on a home without having money upfront.
But there's another option in certain states. Called residential PACE loans, for Property Assessed Clean Energy, they're offered in California, Florida and Missouri. Other states have PACE programs, though most only offer them to commercial properties. The loans are for clean energy improvements and can be used to finance home energy upgrades or water-efficiency investments, along with emergency repairs or replacements such as a leaking roof or broken furnace.
PACE loans don’t require any money down or a credit check. Homeowners must show they have equity in their home, have a good history of making mortgage payments, and earn enough to afford payments on the debt.
The loans are repaid at interest rates of 7-9 percent through an assessment made through property taxes. Like property taxes, a PACE assessment is attached to the property and not the individual, and is transferred with the sale of the property to the new owner. If a home goes into foreclosure, a PACE assessment adds a lien to the home that is senior to the primary mortgage.
The improvement funded through PACE is paid off over the lifetime of the equipment being added, such as about 20 years for solar power.
Other PACE benefits
In addition to paying for energy efficiency home improvements, PACE assessments — which aren’t technically loans — have other benefits that go beyond adding clean energy or better windows to your home.
One big benefit is that your home’s energy bills should drop, making your home more affordable, says Jacob Corvidae, a manager at the Rocky Mountain Institute, a non-profit think tank based on Boulder, CO, that focuses on clean energy transitions.
The average U.S. household’s energy and water bills add 25 percent to the monthly cost of homeownership, a 2017 study by ATTOM Data Solutions and Utility Score. Monthly utility costs require 7 percent of average wages, the study found.
By lowering energy bills, PACE loans lessen the default rates on homes. Energy-efficient homes have, on average, have a 32 percent lower risk of default than nonefficient homes, according to a study by the University of North Carolina’s Center for Community Capital.
PACE can also be used to make emergency repairs or replace something that’s near the end of its lifespan. A 2017 study by Research Into Action found that 37 percent of PACE financing is used for emergency repair or replacements needs, while 23 percent is used to repair something that “was likely to fail in the near future,” such as a broken furnace or roof so they could protect their health, safety and home investment.
First lien problems of PACE
Mortgage lenders sometimes have problems with PACE assessments because, as first liens, they get paid ahead of the mortgage in a foreclosure. Some lenders want the seller to pay off the PACE loan before the home is sold so they won’t have to possibly take on a PACE lien later.
Under the Obama administration, the Federal Housing Administration insured mortgages that carry liens created through PACE. The Trump administration reversed that decision. The FHA cited a concern about the potential for increasing losses in a mortgage insurance fund from PACE liens that go into default.
But that thinking ignores the fact that PACE actually lowers default rates by lowering energy bills and making homes more affordable, Corvidae says. The UNC study found that non-energy-efficient homes have a 47 percent higher default risk than efficient homes.
“There’s reason to believe that the first lien isn’t much of a threat to the mortgage industry,” Coreidae says.
Other green energy payment options
The high interest rates of PACE of 7-9 percent could be enough to send homeowners looking elsewhere to pay for green energy home improvements. The average PACE loan is about $20,000, according to Corvidae. That amount should be relatively easy for most homeowners to get through a home equity line of credit, and at a rate that is about half what a PACE loan can be.
A 2015 report by BMO Harris Bank found that 17 percent of people use home equity lines of credit to pay for home improvements.
Most people pay with savings — 58 percent — and 18 percent pay with credit cards, adding up to 76 percent financing their home improvements through savings or credit cards.
However energy efficiency home improvements are paid for, they ultimately improve the public good by “improving housing stock and energy assessment,” Corvidae says. While not as low as other financing options, PACE can help some people achieve that goal.