The good, the bad, and the ugly.
We all live in a world where saving money anyway we can is always a good thing. As my faithful readers all know, I spend a great deal of time talking about how insulating your attic, replacing your air conditioner, sealing your ducts etc. can save you big time, especially if you are living in a home you plan to stay in for the next fifteen to twenty years.
The issue when doing these types of improvements is the costs involved and they can easily range into the thousands of dollars. In this author’s humble opinion, unless you have the last name of Gates or perchance Zuckerburg, having the ability to fund a six or eight thousand dollar project on a random Tuesday can be a considerable challenge. This is where a PACE program can be a life saver.
PACE stands for Property Assessed Clean Energy, which is a fancy way to say that your house is going to borrow the money and it isn’t based on your personal credit score. Let’s have a look at the rules.
PACE begins with you having equity in your home or condo. The amount that the house can borrow is up to forty percent of the available equity. If you have $100,000 in equity you can realistically finance a project up to forty thousand dollars. The project must have something to do with energy savings in the home. These can be things like hurricane windows, new air conditioners, new duct work, attic insulation, tank less water heaters along with solar options or any combination of the above. So, benefit number one is that in making any of these improvements you are going to lower your electrical usage. Benefit number two is that you do not need to come up with any cash out of pocket, as again, the home is borrowing the money. The terms for these loans or tax liens can range from five to twenty-five years with interest rates ranging from 5.5% – 7.99%. Wait did you say tax lien? Yes! Yes, I did! Stay with me and we will get to that in just a bit.
Okay, so you’ve chosen your projects and you are ready to start making those much needed home improvements. Let’s exercise a little Caveat emptor, or buyer beware. First off are the interest rates, if you choose a fifteen-year term your rate is going to be 7.99%. When you do the math out on the project you will find that if you are doing $12,000 in home improvements the pay back if you ride the loan out to term is going to be close to $26,000. The payment in this example is going to be around a hundred and forty-three dollars a month. With a little luck, hopefully you are saving fifty or sixty dollars a month on the FPL bill so you are only adding a hundred dollars a month or so to the bottom line, and of course, enjoying the benefits of the improvements you’ve made. Not too shabby if you ask me.
Remember that tax lien? This is where the ugly part of a PACE program comes in. Because you are tapping into the equity of your domicile, the assessment that is placed on the home is placed in the FIRST position. What does that mean you ask? Very simply, if the house is going to be sold or there is a change that is leading to foreclosure the PACE program is going to get paid before the bank that owns the property does. We all know banks and of course you know the banks are not happy at all if they don’t get paid. Again, if you plan to stay in the home for the length of the loan this is no big deal, it is a big deal though if you decide for some reason or another, that you are going to sell the house before the assessment has been repaid. That is where the trouble is going to begin.
So you took out the PACE line of credit and it’s eight years later, you just landed your dream job in California and it is time to sell. Now what? You are going to have to pay the assessment off in full before you can sell the home. Wait what? I must pay it off before I can sell? The loan is on the property taxes, why do I have to pay it off?
Simple answer, the new buyer of your home will not be able to get a mortgage for the house from any bank. This goes back to the fact that the assessment is considered a first position lien and if the new buyer can’t afford the house for some reason and it goes into foreclosure, the PACE people will get paid first. Here is the other kick in the pants. The various PACE programs charge a pre-payment penalty of typically five percent to pay off early.
So, there it is in a nut shell folks, if you are considering choosing one of the PACE programs for your home improvement needs, please go into it with eyes wide open, dot your I’s and double cross your T’s, otherwise down the road you could be in for a rude awaking.
Until next week my friends, stay thirsty.
House Whisperer out!!
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