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Residential PACE financing makes solar accessible to homeowners

Avatar for Ben Zientara
Published on 05/23/2016 in
Updated 06/02/2016

PACE financing (“Property Assessed Clean Energy”) is a huge opportunity for homeowners who want solar, but may not have a ton of cash or good enough credit for a low-interest loan or lease. As the name implies, it uses the value of the property as the collateral for a loan to purchase energy-efficient improvements for the home.

The way PACE financing works is a bit different from a traditional loan, because the only qualification for financing is whether the homeowner has available equity in the property. The loan is funded through a private lender but payments are made as a special tax assessment on the property, then repaid as part of monthly mortgage payments the same way as other assessments.

That makes PACE loans 100% transferable when the property is sold, and also usually makes interest paid on the loan tax deductible.

What PACE financing means for homeowners:

Getting a PACE loan means you can make energy improvements to your home and pay the cost back slowly over time. PACE loans can be amortized (paid back) over terms of 5-25 years, depending on the kinds of improvements you make. And it doesn’t just work for solar panels—PACE loans can fund improvements to water efficiency, insulation and windows, and the installation of efficient appliances, among other things.

Interest rates for PACE loans are fixed, and usually end up a little higher than the rate for a Home Equity Line of Credit (HELOC). Rates range from a low of around 5% to a high of around 8.5%, depending on how long of a repayment period you’re shooting for.

A piece of great news here is: if your PACE loan is secured by the value of your home, the interest is tax-deductible.

States where you can get PACE financing for your solar project:

There’s an easy first step in determining if you can get PACE financing for your home: do you own a home in California, Connecticut or Florida? If yes, you’re in luck! If no, keep your fingers crossed for your state to get it together.

In fact, 30 states currently have some kind of PACE rules in place, but up to this point, PACE has been mostly reserved for commerical properties. Very few of those 30 states have current offers for homeowners. Some areas in Colorado, Missouri, and New York have residential PACE programs, so be sure to check the PDF from PACENation to see of your area is one of them.

Credit: PACENation

How to get PACE financing:

The first step is to find a PACE provider in your area. The Center for Sustainable Energy has a good website with a list of PACE providers all across California, though it’s missing some of the newer ones out there, like PACEfunding.

The second step is to apply for financing, get in touch with a local solar installer or energy efficiency improvement contractor, and schedule the work to be done. Look for loan rates between 4 and 6 percent, which will likely be on loans with shorter repayment terms. Shoot for 10-15 years, and you’ll make a good profit after paying your loan off, while still saving money on electricity bills from the start.

The financial returns of a solar installation with a PACE loan:

Here’s the best part about taking a loan to pay for solar: You get the energy savings and the 30% federal solar tax credit, all without spending a dime of your own money! We ran the numbers for a typical 5-kW installation in California, with a 5% interest loan amortized over 15 years, and compared it to the same installation paid for with cash. Check out what we found:

Here are the facts:

  • A 5-kW solar installation in California will run you $17,500 these days
  • You qualify for a 30% federal income tax credit, which equals $5,250 for this installation
    • If you pay up front, that brings your cost after the first year down to $12,250, and you’ll start making a profit in year 10
    • If you take a loan, use the tax credit to pay the loan down by that amount. You’ll save almost $4,000 in interest by doing that, and pay off the loan 5-and-a-half years early
  • All in all, the two investments offer nearly identical cash returns, but the internal rate of return (IRR) for the loan is a mind-boggling 21.5%, while it’s just 13.4% (still nothing to sneeze at) when you pay up front.

That’s huge! With a PACE loan, you don’t have to put any of your own capital in the game; just equity. The graph above doesn’t take into account another benefit of a PACE loan: interest paid is tax deductible! That’s sure to save you another good chunk of change as you pay the loan down. Learn more by reading the ultimate

Drawbacks of PACE financing

Everyone loves solar panels and energy-efficient improvements to homes, right? Usually. Study after study of home sales in California and other states have shown that homes with solar sell for more—and sell quicker—than comparable homes in the same neighborhoods.

But (there’s always a “but”) people don’t like having to pay more in special tax assessments than they would for another home. There have been some reports of homes with outstanding PACE loans staying on the market for long periods of time, or even not selling at all.

But paying a little more in property taxes is just part of the problem. PACE loans usually have one trait that makes mortgage lenders run the other way: they have what’s called a “super priority” lien position. In plain English, that means if a homeowner defaults on the mortgage, the PACE lender gets paid back first in any settlement, even before the bank that holds the mortgage.

This priority lien position has made PACE loans very attractive to Wall Street investors, who see the loans as ultra-secure investments with steady, predictable interest incomes. But it has turned off many mortgage lenders, so much that they won’t allow their borrowers to buy properties with outstanding PACE loans.

As an attempt to remedy these issues, the FHA has issued guidelines for how prospective homeowners would be able to take advantage of PACE loans. The guidelines lay out rules that define the qualities of a PACE loan that would be acceptable to FHA, including preserving the order in which liens on the house would get paid back if the owner defaults (i.e., mortgage lender first, PACE lender after), and some PACE lenders have begun to follow suit.

Time will tell whether the new FHA rules will result in a renaissance of the residential PACE market all over the country, but one thing’s for sure now: if you own a home in California or Florida and you have some equity in it, going solar with a PACE loan can be a tremendous financial decision, resulting in decades of clean energy and huge savings on your electric bill. And who wouldn’t love that?

Last modified: June 2, 2016

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