How to refinance a PACE loan is a tricky situation. Most lenders insist on completely clearing off your PACE loan before getting a new one. But, with this guide, you’ll find out the best options.
If you’re like most homeowners, you probably think of home improvement projects as a huge hassle. Not only do they require a lot of time and effort, but they can also be quite expensive.
But what if there was a way to finance your home improvement projects in an affordable and sustainable way? Well, there is.
PACE loans are becoming an increasingly popular financing option for homeowners who want to make energy-efficient upgrades to their homes. You can use PACE loans to finance energy-efficient home improvements like water heaters, solar panels, and insulated windows.
What happens if you already have a PACE loan that you want to top up? Can you refinance a PACE loan? Well, it’s possible to refinance these kinds of loans. So, today, we dig deeper into how to refinance a PACE loan, including the best steps you should follow. But first, let’s get the basics.
Understanding PACE Loans
PACE stands for “Property Assessed Clean Energy.” On the other hand, a PACE loan refers to a loan extended to help homeowners make property improvements that support energy efficiency or that promote renewable energy.
It is a tax system where property owners pay taxes directly related to making a home more energy-efficient or installing renewable energy systems. The average PACE loan is about $25,000; you pay it back as additional property taxes for up to 25 years.
The loan aims to make it affordable for you to make energy-efficient improvements in your home without too much struggle. PACE loans can be used to finance the following home improvements:
- Heat pumps
- LED lighting
- Solar panels
- Air conditioning
- Preparedness for natural disasters
- Cool roofing
- Landscaping irrigation
- Insulation
As a homeowner, you enter into a voluntary contractual agreement called a PACE assessment to finance energy-efficient improvements. These improvements are permanently fixed to your property.
Usually, it’s quite easy to get a PACE loan approved. All you require is a quick conversation and signing an online contract. The exciting thing is that the amount you can borrow varies by lender but can reach 15% of the value of your home.
The most important thing to note is that PACE loans are first-lien loans. This means they prioritize your primary mortgage, and you pay it back first.
That’s not all. PACE loans have interest rates between 4% and 9%, and closing fees are slightly over 6% of the total loan.
In contrast to most other renovation loans, PACE financing does not consider your income or credit score. You qualify for the loan based on your location, equity, and your home’s value. Sounds good, right?
Generally, PACE is different from other loans because it doesn’t have a regular loan model. Instead of paying back the loan in monthly installments, you pay it annually through tax assessments. Also, your property is the collateral, so the debt is tied directly to it and not to you.
Essentially, if you sell the house and still owe money toward the PACE debt, the PACE debt will transfer over to the next owner. Notably, you lose your home when you fail to pay your taxes.
How to Refinance a PACE Loan
The bone of contention is, can you refinance a PACE loan? Until recently, you could not refinance your mortgage loan if you had an existing PACE loan. As discussed previously, PACE is a first-lien loan with a top priority. Thus, bank regulations wouldn’t allow your PACE loan to be the second priority.
However, the situation changed when the White House released its Clean Energy Savings For All Initiative. The initiative permits the FHA and VA to refinance your home loan on the existing PACE lien or loan.
Unfortunately, there are still a significant number of mortgage lenders that refuse to participate in the government’s initiative. You will most likely experience a lender who claims that you can’t refinance your property with a PACE lien.
But the good news is that a few mortgage lenders accept PACE loan refinancing. And, they offer the following options.
- Home equity loan
- Cash-out refinance
- Home renovation mortgage program
With an online platform like eMortgage you can apply for any of the above options with ease and you’ll be able to compare rates and terms against various lenders.
1. Home Equity Loan
When you consider refinancing your PACE loan while keeping your current mortgage in place, a line of credit or home equity loan is your best option. In this case, the first mortgage remains in place, and you repay the PACE loan with a home equity loan.
Refinancing a PACE loan with a home equity loan usually makes sense when your mortgage offers attractive terms, such as low interest rates. Furthermore, home equity loans often allow higher combined loan-to-value ratios than traditional refinances, thus benefiting homeowners with limited equity.
Another benefit of a home equity loan is lower closing costs than a standard refinance. A smaller loan amount also means lower interest expenses, making a home equity loan a more cost-effective option.
Paying off a PACE loan with a home equity loan is typically a better alternative since you can determine how to use the proceeds, and interest rates are fixed.
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2. Cash-Out Refinance
A cash-out refinance uses your house’s equity to repay your current mortgage and your PACE loan. You should consider this option when refinancing, as it will lower your mortgage rate.
You can lower your monthly debt payments when you get a new mortgage with a lower interest rate than your current mortgage and a PACE loan. Refinancing with a standard mortgage program saves money and time because closing costs are usually lower than renovation mortgage programs.
However, cash-out refinancing may not allow you to pay off your current PACE loan and the mortgage unless you have a lot of equity in your home. Luckily, this method can reduce your total debt payments if you have sufficient equity on your property.
You may contact different lenders to help you determine your mortgage eligibility and compare mortgages. It’s important to note that most lenders do not allow you to refinance your first mortgage and maintain your PACE loan simultaneously.
By default, the PACE loan has priority and interferes with the lender’s ability to recover their principal. For this reason, you must pay off your PACE loan in full before refinancing.
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3. Home Renovation Mortgage Program
A home renovation mortgage program allows you to refinance your home and include the cost of home improvements in your loan amount when buying a home or refinancing an existing mortgage. Usually, these programs finance significant home improvements and refinance your current PACE loan or mortgage.
Their primary benefit is allowing higher loan-to-value ratios than normal refinance programs. A home renovation mortgage may be a good option if you don’t have a lot of equity in your home, which is true for many PACE loan borrowers.
Here are the three main programs under the home renovation mortgage:
- FHA 203(k) Mortgage Program: You can use this program to refinance your existing PACE loan and any mortgage on your house. As part of the 203(k) program, the loan-to-value ratio for refinances is set at 97.75%.In addition, FHA mortgages have lower loan rates, offsetting the extra costs.
- CHOICERenovation Mortgage Program: This program also refinances your existing PACE loan or mortgage. A primary residence can have a maximum loan-to-value ratio of 97%. However, there are drawbacks to this program, including the possibility of paying a higher mortgage rate and paying more closing costs.
- HomeStyle Renovation Mortgage Program: Provides borrowers with the option of refinancing their existing mortgage and including funds to pay off their PACE loan in the mortgage amount. In fact, the proceeds from the loan can repay your PACE loan instead of renovations.
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Benefits of Refinancing Your PACE Loan
Generally, energy efficiency improvements require years before you realize a return on investment. For this reason, it’s always better to finance them as a tax assessment rather than through a regular loan.
Some of the main benefits of refinancing a PACE loan include:
- Allows you to pay your loan faster: If you get better terms, you could be able to pay your loan within a shorter term. This allows you to get out of debt faster.
- Might help you to pay less in the long run: If you refinance with a loan that attracts less interest rate, you’ll probably end up paying less by the end of the loan period.
- It eases the repayment burden: by consolidating your loans, you can pay one big loan that you can monitor. This helps you reduce the burden of dealing with several small loans that might be hectic.
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Getting Started: How to Refinance Your PACE Loan
PACE loans can be an excellent way to make your home more eco-friendly, but is it the right option for you? You should consider a PACE loan if:
- You’ll stay in your house long enough to repay most of your PACE loan.
- You can afford to pay your PACE payments in your annual tax assessment.
- You need to upgrade your home and make it more eco-friendly, but you don’t have sufficient funds.
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Requirements for Refinancing
The PACE loan approval process is more flexible than most other types of home loans. This is because it doesn’t consider your credit score, income, or credit score. Instead, your home or property’s equity determines your eligibility.
Generally, applicants must have all tax bills updated, and their loan-to-value ratio cannot exceed 90%. But bearing in mind that qualifications vary in each state, here are the specific refinancing requirements:
- To obtain a new loan, you must have adequate equity available to pay off the existing PACE loan.
- You must have at least 10% equity in your homes.
- You must be current in paying your mortgage and property taxes in the last 12 months.
- There is no recent bankruptcy request on your record
- You are the owner of the house
- Your home has a minimum of 10% equity
- You don’t have involuntary liens on your home
- Your property is in a state that supports the PACE program
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Steps of Refinancing Your Pace Loan
Refinancing your PACE loan usually lowers the interest rate and monthly payment. In order to maximize your chances of getting a new loan at the most competitive rate, it is crucial to understand the refinancing process to ensure you make the right financial decision.
Here are the eight steps on how to refinance your PACE loan:
Review Your Financial Credentials
Typically, in refinancing, lenders look at a homeowner’s credit score, income, and level of debt to determine if they are eligible for the loan.
You may not qualify for affordable refinance rates if:
- You have a low credit score
- Your debts are higher than your income
- You don’t have sufficient income
Therefore, before anything else, check if you have a healthy credit score.
Choose the PACE Refinance Loan You Need
Choosing the right option depends on a few things, including your PACE loan balance, the value of your home, the amount of your loan, and your personal financial goals.
Analyze the available PACE refinancing options, including pros and cons, and choose the most suitable one to meet your financing needs.
Calculate Your Home’s Equity
The majority of lenders will not allow a PACE refinance loan with a value of 90% of your home. The reason is you already have an existing PACE lien on the house.
You can estimate the amount of PACE refinancing you qualify for by using a PACE loan calculator to compare the value of your home and what you currently owe. If your debt exceeds 90% of your home’s value, then you aren’t eligible for PACE refinancing.
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Find a PACE Refinance Lender
Get quotes from various lenders to find the best deal. Get at least three to five loan estimates from at least three to five lenders within 14 days. This allows you to lock in the best interest rate immediately.
Ensure Your Documents are in Order
After you have shopped around for a few lenders, make sure to gather all financial information related to your assets, debt, and income. Depending on the lender’s evaluation, you may need to submit additional documents.
The documents may be different for each lender, but you need:
- Bank statements for the last two months
- W-2 forms for the past two years
- The current property tax bill
- Insurance policy for your home
- Your current PACE loan statement
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Fill Out the Loan Application
Apply for a PACE refinance with your lender. And, you need a few pieces of information. Online applications with supporting documents are now routine.
Review your closing disclosure and finalize your loan figures. Verify the numbers before signing to ensure they are accurate.
Property Inspection and Appraisal
Lenders must ensure that your home provides sufficient collateral to guarantee the loan. Inspections ensure your home is structurally sound, and appraisals confirm its value. The lower the value, the less money you will receive.
Close on Your Loan
The lender proceeds with the loan if your financial credentials check out and there are no issues with your appraisal or inspection. Your lender then sets the closing date. Your current PACE loan is paid off by that date, and you start paying your new refinance loan.
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How to Get Out of a PACE Loan
Knowing how to refinance a PACE loan, is it possible to get out without hurting your wallet? Fortunately, a few options exist to get rid of your PACE loan. It is even possible to lower the high interest rates on the loan so you can save money.
Refinancing your loan is the quickest and easiest way to pay off PACE loans. Not only can you lower your tax bill by refinancing, but you will also pay less in monthly mortgage payments. You should, however, renew the financial payoff request with your financier first if you wish to refinance or repay it fully earlier.
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Can You Subordinate a PACE Loan?
Unfortunately, you can’t subordinate your PACE loan to your home. PACE is a first-lien loan and has priority for payment.
To refinance your loan, you must pay off your PACE loan first. Thus, there is no option to subordinate the PACE assessment.
