I need green mortgage advice for solar panels I'm installing on my home. What are the pros and cons of PACE vs. traditional financing?

Asked by Julie Reimers
Berkeley, CA

I have heard about the PACE and AB811 program. Is this a better deal for me than a traditional loan?


Rick Williams

Answered by Rick Williams

Aptos, CA


March 30, 2010

The advent of the AB811, or PACE (Property Assessed Clean Energy) financing for homeowners has been very well received by those of us in the energy efficiency arena. Initial successes in Berkeley and Palm Desert were supplemented by an excellent program in Sonoma County in the spring of 2009. Recently, the CEC has awarded $16.5 million towards this program from the SEP funds provided through the ARRA bill of 2008. This funding will assist over 160 Californian jurisdictions in providing this financing to homeowners in 14 counties over the next two years. Similar programs are being developed in other states. It is definitely a step forward, but as a green mortgage consultant, I am often asked what are the advantages and disadvantages to the homeowner.

The advantages of this property assessment financing include the fact that a homeowner may now finance energy efficiency improvements to their property thus lowering their energy costs in the short term, without concern for the 10- to 15-year return on investment that such improvements require. This is because the financing is attached as a tax assessment to the property, rather than the homeowner. So if the homeowner moves on in the traditional 5- to 7-year time frame, the additional financing is passed on to the new homeowner who continues to receive the lower energy costs. Additionally, with the current strict mortgage underwriting that does preclude many borrowers from qualifying, this PACE financing can be done with no income documentation.

The disadvantage is the shorter amortization and higher interest rate offered in such programs. Current programs offer 7 to 8% interest rates with a 15 to 20 year amortization vs. 30 year mortgage currently at 5.0% or below. As a result, the average $25,000 energy upgrade or retrofit to a home would cost the homeowner:

7.5% 15-year amortization; $231.00 per month compared to

5.0% 30-year amortization; $136.00 per month for that $25,000 figure

This difference is assuming that the homeowner qualifies for a complete refinance of their home to secure that low 5.0% rate. If the PACE financing is compared to the HELOCs or second loan, there is little disadvantage in the monthly payment. However, when the homeowner is ready to sell, will that additional $231 per month lien be well received by the next homeowner? That has many Realtors puzzled.

In summary, if the homeowner can qualify for today’s low 30-year rates on a refinance, I would recommend a cash out refinance, FHA or Conventional in order to secure the funding for the energy upgrade and the additional discounts offered by lenders for energy efficient upgrades. If they cannot meet the income or credit score requirements in today’s market, the PACE financing provides the Californian homeowner with an excellent solution to decreasing their energy costs while meeting the CEC’s goals of increasing energy efficiency in California. With all the tax incentives and other programs available, the choice is up to the homeowner who wants to reduce their energy costs now.

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