Energy efficiency is important for a lot of homeowners – not just to reduce environmental impact but also to decrease the cost of utilities.

But any major home renovation to achieve greater energy efficiency is going to be expensive. You may not have a lump of cash lying around, and additional financing on top of your current mortgage may seem like a daunting and dangerous burden.

Enter the PACE loan.

Property-assessed clean energy programs, first implemented in the U.S. in California in 2008, are a form of financing that allow property owners to fund energy-efficient retrofit projects at no upfront cost to them. Instead, an assessment is placed on the property and appears as an increase to property taxes until the loan is repaid as many as 30 years down the line.

[See: 10 Ways to Save Energy and Reduce Utility Bills at Home.]

The Good

PACE financing programs, first allowed by state legislatures and then adopted by local municipalities with third-party PACE programs to provide the funding for improvements, have grown nationwide over recent years. As of January 2016, PACE legislation has been authorized in 33 states and the District of Columbia, and 17 of those have active PACE programs, according to the National Conference of State Legislatures. However, most of these programs are specific to commercial real estate, with residential programs rare on a national scale but still fairly common in states like Florida and California.

Homeowners living in jurisdictions with PACE programming are able to fund upgrades like duct replacement, solar panel installation, new insulation and even impact-resistant windows in hurricane-prone areas. In commercial real estate, PACE projects are much larger, with improved air circulation, heating and cooling, and alternative energy sources costing hundreds of thousands of dollars.

Launched in July 2015, the Show Me PACE program in Missouri focuses on PACE financing for commercial, agricultural, industrial, nonprofit and multifamily properties. Just over a year after opening for business, $10 million worth of projects have been completed under the program, says Josh Campbell, executive director of the Missouri Energy Initiative and president of the Show Me PACE board of directors.

“For a commercial property, that money they save as a business, they are much more likely to put that directly back into that business, making them stronger and much more likely to be happy with where they’re at, and more likely to stay at the property longer,” Campbell says.

Missouri requires the financial benefit of improvements made under a PACE project to outweigh the cost of the work itself, and the project must be approved by a third-party lender for an existing loan on the property.

The Bad

A property assessment automatically becomes the first lien for any property, which means in the case of default or foreclosure, all missed payments on that property assessment must be paid before the mortgage can be paid back. Prior to guidance from the Federal Housing Administration in July, repayment of entire PACE loans took priority over paying back the property’s mortgage.

Therein lies the problem: Mortgage lenders aren’t able to recover as many of their losses in the incidence of foreclosure, all for a loan that didn’t require underwriting or credit approval. Fannie Mae and Freddie Mac won’t back mortgages with existing PACE assessments unless first-lien status is given to the FHA loan. Campbell notes Missouri clarified PACE programs' first-lien status to only account for that year's assessment status if a property goes into default. But not all states have defined the lien in the same way, leaving lenders at risk.

In June, the Federal Housing Financial Agency testified to the California legislature regarding PACE financing.

“The financing concept is simple – if a residential property has to lose 90 percent of its value before a PACE lender incurs a loss, the investor has a very attractive investment opportunity,” Alfred M. Pollard, general counsel to FHFA, said in his statement to the California legislature. “However, that opportunity comes at the expense of existing lien holders, who unexpectedly bear a new risk of loss, and, in some instances, to the disadvantage of consumers.”

California’s acceptance of PACE programs in many municipalities throughout the state was initially met with excitement from real estate professionals, explains Alex Creel, vice president of governmental affairs for the California Association of Realtors. But concern quickly took over when programs implemented didn't appear to clearly explain the potential for difficulty in future sale of the property, refinancing and mortgage lending deals, Creel says.

When selling a home just a few years after completing a PACE project on the house, you could find yourself having to pay off the entire assessment before you can close a deal, Creel says.

In his testimony to California legislators, Pollard echoed the concern about homeowners understanding the costs: “PACE programs in many, but not all, instances are administered by third parties that do not follow the same consumer protection requirements applicable to residential mortgage lenders.”

Your Options

Both the FHFA and CAR stress that affordable solutions to energy-efficient renovations in homes as well as commercial real estate are important – and necessary – to reduce negative human impact on the environment. But the current PACE system creates more short-term problems for homeowners and mortgage lenders that wouldn’t exist otherwise.

[Read: 11 Ways Homeowners Can Fund Major Home Improvements.]

For energy-efficient retrofitting, the FHFA recommends more traditional lending options, some even designed to finance energy efficiency, that operate similar to a second mortgage.

A home equity line of credit is one recommended alternative to PACE financing. This option is well-suited for home improvements that save money through reduced utility costs and add value to the property in the long run. As with any form of borrowing, homeowners should approach the process cautiously and carefully weigh the loan amount with a solid plan to repay it.

And while residential PACE programs may not be as informative as they could be, that doesn’t mean all PACE financing opportunities aren't worthwhile. As Campbell notes, Missouri requirements for PACE financing have helped foster positive outcomes for not just the property owners receiving funding but also for the lenders already involved in the property, as those requirements encourage conversation and negotiation so both sides feel confident about a project.

A California state law that goes into effect in January 2017 requires PACE lenders to provide borrowers with disclosure information about the loan they’re taking on – similar to the TILA-RESPA Integrated Disclosure forms now required for all mortgages issued nationwide.

[Read: A Homebuyer’s Guide to Federal Policy on Mortgage Lending.]

Creel says this law, which as a bill was sponsored by CAR, will help homeowners understand what they’re getting into when they sign on for PACE financing and be prepared for obstacles in the event they want to refinance or sell their home.

But even then, Creel says it won’t completely solve future problems: “A lot of times people don’t read what they sign, unfortunately.”

Corrected on Dec. 16, 2016: A previous version of this story incorrectly stated how much of a PACE loan must be paid back in the event of default. In default or foreclosure, the arrearages on a PACE loan must be paid back before the property’s mortgage can be repaid.

Corrected on Dec. 16, 2016: A previous version of this story incorrectly described Fannie Mae and Freddie Mac’s relation to mortgages. Both associations purchase mortgages from lenders.

Tags: real estate, housing, solar energy, mortgages, housing market, energy, energy efficiency, loans, Fannie Mae, Freddie Mac


Devon Thorsby is the Real Estate editor at U.S. News & World Report, where she writes consumer-focused articles about the homebuying and selling process, home improvement, tenant rights and the state of the housing market.

She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.

Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at dthorsby@usnews.com.

Recommended Articles

Packing Tips for Moving to Your New Home

Devon Thorsby | July 12, 2019

Prevent a moving-day disaster with these expert packing tips.

Living Room Renovation Ideas on a Budget

Devon Thorsby | July 10, 2019

Give your living room a personal touch with these simple remodeling ideas that won't break the bank.

Should You Get a Swimming Pool?

Lisa Larson | July 8, 2019

Before you call up a local pool installer, consider the costs, hassle and potential added value that a pool could bring.

Best Places to Live in North Carolina

Devon Thorsby | July 5, 2019

Which Tar Heel State metro area meets your needs for cost of living, job market and quality of life?

The Best Places to Live in Pennsylvania

Devon Thorsby | July 3, 2019

Which metro areas in the Keystone State would best fit your needs?

The Hidden Costs of Buying a Home

Dima Williams | July 1, 2019

Aside from the price of a property, various expenses accompany its acquisition.

5 DIY Backyard Renovations on a Budget

Devon Thorsby | June 28, 2019

Transform a difficult backyard with the right materials and some sweat equity.

Best Places to Live on the East Coast

Devon Thorsby | June 26, 2019

See which metro areas on the Eastern Seaboard offer the most for residents.

5 House Flipping Mistakes to Avoid

Deanna Haas | June 24, 2019

Here are five common errors to avoid that can imperil your house flipping investment.

7 Bathroom Remodel Ideas on a Budget

Devon Thorsby | June 21, 2019

These renovation options can make your bathroom feel new again.

The Best Places to Live for Families

Devon Thorsby | June 19, 2019

These metro areas meet the most important criteria for families looking to relocate.

Should You Buy a Fixer-Upper?

Steven Gottlieb | June 18, 2019

Buying a home that requires a major renovation may take more coordination than you think. Here are four questions to ask yourself before taking the plunge.

7 Kitchen Remodel Ideas on a Budget

Devon Thorsby | June 14, 2019

Transform your kitchen with projects that won't require you take out a loan or spend your entire savings.

Buying: How Many Homes Should You Tour?

Robin Kencel | June 13, 2019

Here are the factors that contribute to whether you'll be able to find the right home on your first tour or tenth.

Best Places for Public Transportation

Devon Thorsby | June 12, 2019

These metro areas have public transit systems that help a significant number of their residents get around.

How to Rebound After an Expired Listing

Lisa Larson | June 10, 2019

An expired listing with your real estate agent shouldn't be considered a failure. Here's how to get your home sale right the next time.

8 Outdoor Patio Decorating Ideas

Devon Thorsby | June 7, 2019

Make your time outside a little more enjoyable with these decor tips.

Outlook for the Housing Market in the Next Recession

Devon Thorsby | June 5, 2019

Homeowners should not fret, as long as they're prepared for the possibility of a downturn.

Should You Sell Your Own Home?

Deanna Haas | June 5, 2019

The "for sale by owner" approach is a great option for some, but not for everyone. Are you a qualified candidate for the FSBO route?

Buying a Home in a Buyer's Market

Wendy Arriz | June 4, 2019

Many parts of the U.S. are seeing homebuyers have the upper hand at last. Here's how you can make the right deal during a buyer's market.