Energy Efficient Home Improvement Loans: Consider with Caution.

A new equity-based loan has surged in the last few years. Property Assessed Clean Energy loans, known as PACE loans, are designed to encourage the installation of energy efficient home improvements such as solar panels, energy efficient windows, LED lighting, and energy-efficient air conditioning units. The loan is generally paid for via an increase in property tax over typically 5 to 25 years. The loan (similar to Mello-Roos bonds) is attached to the property and not personally to the individual homeowner. When the home is sold, the new property owner is required to continue paying on the loan via higher property taxes. The loans are typically securitized into bundles of thousands of loans and sold on Wall Street to investors, who have been snapping them up quickly in recent months.

A benefit of a PACE loan is to allow individual homeowners (and businesses) to defer the upfront costs of energy efficiency improvements. For example, if a $20,000 solar system saves more on annual electricity cost than the annual loan outlay, the homeowner may be better off financially and will be generating less greenhouse gases for society.

The downside is that PACE based programs have several problems. First, homeowners are financed for the home improvements without any calculation of whether the financing is affordable for the homeowner! There are an increasing number of stories where property taxes greatly increased from say a couple of thousand per year to over $6,000 or more per year. Suddenly a homeowner may owe far more in property taxes than they can afford to repay, especially so for retired home owners on fixed incomes. Maintenance people and installers with little finance training or oversight, function as loan brokers. Additionally, the loan disclosures are far less informative than traditional home loans.

The financing costs for consumers with PACE loans may also be relatively high. Interest rates for PACE programs are typically 3% or 4% higher than for traditional mortgage loans, with an additional add-on loan fee approaching 5% of the loan amount.

Sometimes sellers have had difficulty with the sale of their home where a PACE tax assessment is attached. Buyers may question the assessment, forcing the seller to pay off the loan early or reduce the sales price. So if a homeowner may be selling a property in the near future, they may want to avoid a PACE based loan. Call me with questions or issues related to residential real estate sales and purchases in the College Area.

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