What drawbacks could there possibly be with a government-sponsored program to enable homeowners in Kern County to reduce their utility bills while helping to save the environment? Plenty.
First, here’s some background about this important issue. Fact: The Property Assessed Clean Energy program allows homeowners to finance through an assessment on their property various energy conservation-related improvements, such as energy-rated water heaters, windows, and solar panels.
Fact: When the house is sold, the assessment may transfer with the property and become the responsibility of the new owner. However the majority of mortgages prohibit this transfer.
Fact: The loans are repaid over as long as 20 years. A PACE lien is similar to a property tax lien. In fact, it’s a line item on the homeowner’s property tax bill and is paid at the same time and in the same way as property taxes. There are definitely some downsides and hidden risks to this increasingly popular program that should concern every homeowner.
Here are five key realities about PACE liens:
Reality No. 1: You may wind up borrowing too much on your property because the limits are very generous. For example, the owner of a $400,000 home could borrow up to $60,000 on their home. Caution is needed to avoid overleveraging your home with a PACE lien. Like a mortgage, the PACE lien comes out of your equity. Unlike a mortgage where a lender, by law, is required to ensure you can afford the payment, PACE lenders are under no such obligation, which could lead homeowners to overleverage their homes.
Reality No. 2: You may not be able to refinance your mortgage with a conventional mortgage. Fannie Mae and Freddie Mac are prohibited from purchasing mortgages with PACE liens on them because as tax liens, they put lenders in a secondary position if the loan cannot be repaid.
Reality No. 3: A PACE lien can be very expensive. Interest rates and fees are generally much higher than those for mortgages or home equity lines of credit. Worse, you will likely have to pay off the lien in order to sell the property to a buyer who wants to obtain conventional financing. Paying off a PACE lien will reduce the amount you can realize from the sale of your home, and in some cases, could impose a financial hardship and make the home impossible to sell.
Reality No. 4: You may have a hard time finding potential buyers for your home. Because Fannie Mae and Freddie Mac will not approve mortgages for properties with an existing PACE lien, conventional buyers will not be able to purchase your property unless the lien is paid off before the close of escrow. This will limit your buyer pool because Fannie Mae and Freddie Mac guarantee approximately 60 percent of all mortgages.
Reality No. 5: Limited mortgage options can create an unfortunate ripple effect. If fewer people can buy your property, it may take longer to sell. The longer the house sits on the market, the less desirable it may become, which could result in a lower sales price. As many home sellers in Kern County have discovered, these realities cannot be ignored.
The bottom line is this: Are the risks and pitfalls associated with PACE liens worth it? That’s a question that all homeowners in Kern County must answer for themselves.