9 Common Questions About PACE Financing
We recently sat down with our resident PACE expert, Jonathan Kevles, to get the inside scoop on PACE financing.
Many homeowners have never heard of PACE financing or have limited knowledge of home improvement financing options in general. How do you explain PACE financing to a first-time audience?
JK: PACE provides homeowners a way to upgrade their homes with investments in energy efficiency, renewable energy, water conservation, seismic retrofits, and hurricane/wind resistance, all with no upfront costs. A homeowner pays back the financing through a new line-item on their property tax bill. Because the investments can be repaid over a period as long as 30 years, the homeowner pays less per month than they would pay if using a shorter repayment term financing option. (Unsecured loans typically have at most a 7 or 10-year repayment term.)
In addition, unlike a Home Equity Loan or other property-secured loan, the remaining balance of a PACE lien does not typically need to be paid off upon sale of the home, allowing the new homeowner to take over the remaining payments (and enjoy the benefits of the improvements that the PACE project financed).
What sorts of home improvements can be financed using PACE?
Homeowners can finance energy efficiency, renewable energy, and other legally allowed improvements (which can vary from state to state), so long as the improvements are “permanently affixed” to the property.
We all know homeowner experiences with contractors can vary widely – how does Renew Financial ensure that the contractors they work with perform quality work and do so with integrity?
With all of the home improvement projects that we finance, integrity and consumer protections are critically important elements. Renew Financial requires that any contractor that wants to offer our PACE financing product to their clients must first pass through a screening, which includes a review of the contractor’s status with the state Contractor Licensing Board and their Better Business Bureau grade or other online reviews.
We also require the contractor to provide proof of adequate workers’ compensation and liability insurance coverages. Contractors that pass the screening must then sign a Contractor Participation Agreement. This agreement requires the contractor to abide by our program rules, which focus on ensuring strong consumer protections.
One of the strongest protections provided is the requirement that, before the contractor gets paid, the homeowner and contractor must first sign a document stating that the agreed-upon scope of work has been completed by the contractor. In addition, we randomly select a few of every contractor’s projects for inspection by a third-party quality assurance firm, who visits the home to ensure that the improvements (e.g. specific model numbers) identified in the scope of work were in fact installed.
What if a homeowner has been rejected by other financing methods? What determines whether they qualify for PACE financing?
Renew Financial first looks at the property to determine if there is sufficient equity to support the project – in most jurisdictions, the combined loan-to-value ratio once the PACE financing has been applied may not exceed 100%, and the PACE assessment amount may not exceed 15% of the home’s value. Then, we determine the property owner’s eligibility, which looks primarily at late payments on property taxes and mortgage obligations and no bankruptcies in recent years.
How do the financing terms of PACE protect me as the consumer? Would a homeowner be better off just putting the home improvement on a credit card?
PACE provides financing terms that are similar to those available for a home equity loan. Interest rates are tied to the term of the loan, not to the credit score or other factor related to the homeowner or to the property itself. Payments and interest rates are fixed over the course of the repayment term, and there are no balloon payments at the end of the term. Repayment terms go as long as the expected life span of the improvements installed, which for solar can be up to 30 years, making for much lower annual payments than for financing options with shorter repayment periods.
What happens if a homeowner signs up for PACE financing but then chooses to sell their home? Are they stuck making payments for efficiency upgrades they’re no longer using?
If a homeowner with PACE financing on their home moves, the PACE financing typically stays in place, and the new owner of the home assumes the responsibility of making the remaining payments (or until the new owner moves, if the repayment term is not over at the time of sale). This treatment of the PACE financing is like any other property tax. If the homeowner chooses to pay off the remaining balance of the Renew Financial PACE financing, they can do so at any time and without penalty.
Are taxpayers ever on the hook should a homeowner not pay their PACE assessment?
In the programs run by private sector administrators (such as Renew Financial’s), all the capital provided for both program administration and the funding of individual projects is 100% privately sourced. Zero public funds are involved, so taxpayers are never on the hook for any defaults. Taxpayers are the backstop only in publicly-administered programs, such as in Sonoma County and Placer County in California. (It’s also worth noting that, through June 2016, privately administered and financed programs accounted for 95% of active residential program activity in California, or $1.77 billion of the $1.86 billion total.)
What is driving demand for this rapidly growing industry?
Demand is growing because PACE offers an attractive alternative to traditional financing options. One of the key benefits is that for the more than 85% of homeowners who don't have a home equity line of credit, PACE provides them an affordable financing option with a fixed interest rate and fixed payment repayment terms that are at least twice as long as most unsecured financing options, resulting in much lower annual or monthly payments than unsecured loans. And, interest rates aren't based on credit scores or debt to income - but are generally based purely on the length of the repayment term.
I’d like to learn more – what kinds of informational resources are available on PACE financing?
For additional information, I encourage homeowners to visit the Renew Financial web site. For detailed and comprehensive information, please see the Homeowner’s Handbook, which is available for our residential PACE programs in California and Florida.