Prepaid interest is also known as capitalized interest.
PACE financing is paid back annually on your property tax bill. Prepaid interest accrues after your contractor is paid for your home improvement project (when your project, “funds”) until the date your initial annual payment is due on your property tax bill.
Due to the structure of PACE financing, there is a gap between when PACE financing funds and when the initial annual payment is due on your property tax bill. The prepaid interest is spread evenly (amortized) into the total amount financed, so the initial annual payment pays for the following year and a portion of the prepaid interest.
Take a mortgage as an example. If you close in the middle of the month, you might have a month or two before your first payment is due. When you make your first payment, you are paying in advance for the following period. Since no interest is collected between your closing date and your first payment due date, this interest is typically rolled into your closing costs or total loan amount. It is the same concept with PACE financing. The difference is that PACE may have a long gap of time in which interest accrues due to the annual property tax schedules.
Tax Roll Cut-off
Each county defines a date for which property taxes are calculated for the prior year. To determine which tax year your initial annual payment will appear, we have a "tax roll cut-off" date for each county. This date determines which property tax year your initial annual payment will appear on and how much prepaid interest will accrue.
There are two potential scenarios related to the tax roll cut-off dates in your county and your PACE application.
1) The estimated window for when your project will fund does not span the tax roll cut-off date in your county. This is usually if your project funds in the autumn or winter.
2) The second is when the estimated window for when your project will fund does span the tax roll cut-off in your county. This is usually if your project funds in the spring and early summer.
Dependency on Funding Date
If your project funds before the tax roll cut-off, you will accrue less prepaid interest because your initial annual payment is on this year's tax bill. If your project funds after the tax roll cut-off, you will accrue more prepaid interest but your initial annual payment will be further out on the next year's tax bill.
Please note: The prepaid interest on your financing estimate represents the maximum amount of prepaid interest that may be included in your financing. The actual amount of prepaid interest included in your financing may be lower depending on when your project is completed.
Prepaid interest does not accrue during the time your contractor is installing your home improvement or before it is completed; it begins to accrue after the project is funded.
A project funds once:
• The contractor finishes the project and submits all final documentation to Renew Financial;
• You approve of the project by signing the Completion Certificate;
• Renew Financial approves the final documentation, and Renew Financial pays your contractor for the project.
Our Customer Care Center is happy to answer any questions or concerns you may have regarding PACE.