Energy-efficient upgrades for homeowners
By Gina Pogol
One of the biggest drawbacks to many energy-efficient improvements is that they require a sizable investment upfront but can take many years to pay for themselves. So homeowners who don’t expect to be in the home long enough to reap the benefits skip the upgrades that could be good for the environment as well as the pocketbook.
What Is PACE?
PACE was created to solve this problem. Under the program, counties raise money through bonds and use them to finance homeowners’ energy-efficient upgrades. The homeowners pay back the loans over time as special assessments on their property tax bills.
Thus the cost of the improvements can be paid for over time with the savings they generate. If the property is sold before the loan is repaid, the new owners take over the assessment. This way, the upgrades are always paid for by the person benefiting from them. The program was quite popular in its first years.
Fannie and Freddie Spoil the Party
However, Fannie Mae and Freddie Mac, which together control about 90 percent of non-government mortgages in the country, have chosen to classify these assessments as loans, not taxes. The mortgage giants decided that in the event of a home foreclosure, the PACE program would be in first position and get paid before the mortgage lenders – this goes against their guidelines.
Fannie Mae's May 2010 letter to lenders characterized the PACE tax assessments as “loans” with "senior lien status to a mortgage”; Freddie Mac joined in the same day with a letter reminding mortgage lenders that an “energy-related lien may not be senior to a mortgage delivered to Freddie Mac.”
Because this could make it difficult or impossible for potential buyers to get financing on the PACE homes, it makes them difficult or impossible to sell. Congressional and legal challenges to the agency’s rulings have failed to overturn them.
Residential PACE Programs Move Forward
Some states and municipalities have continued their residential PACE programs. These programs have taken a number of different approaches to residential PACE as a result of the FHFA’s positions.
Some have chosen to make PACE a junior lien with lower priority than mortgage payments. Vermont, Oklahoma, Maine and Rhode Island have taken this route. Unfortunately, giving PACE junior lien status makes the program less attractive to investors.
Some municipal and county programs keep PACE as a senior lien, providing disclaimers for homeowners enrolling in the programs. Western Riverside Council of Governments has taken this approach in California with the HERO Program. The program addressed the FHFA’s requirements by giving homeowners two cautionary messages. First, homeowners should review their mortgages for any provisions that may be triggered by the assessment. Second, they may have to pay off their assessments when they sell or refinance their homes.
FHA, VA Provide Alternatives
Those who'd like to make their homes more energy-efficient have other options. FHA makes home improvement loans and you don't need home equity to qualify. The loan amount is based on the improved value of the property. These loans take the form of either refinances that include extra funds to pay for qualified improvements, including energy efficiency upgrades, and personal loans for lower amounts. Some personal loans don't even involve liens against your property.
The VA will refinance your mortgage if you’re eligible, and you can add up to $6,000 for qualified energy-related home improvements.Finally, conventional home equity loans and HELOCs are the classic methods of financing home improvements, including energy-efficient upgrades. Interest rates are still exceptionally low, and as housing values increase, more homeowners are finding they have home equity to convert to cash for improvements.
Improving your energy efficiency is a worthy goal and can be accomplished in several ways. Explore your mortgage alternatives and check out home equity loan rates
Author Bio: Gina Pogol spent over a decade in mortgage lending, originating, processing and underwriting home loans. She has written about mortgage rates and finance issues for a number of publishers since 2006. Currently a senior marketing manager with Lending Tree, Gina advocates for consumers and loves answering their mortgage and personal finance questions.
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