Every homeowner knows that, sometimes, you need some upgrades or improvements to your property. These are usually expensive, leaving you with three options: forego the upgrade due to lack of funds, save up until you can afford it, or get a loan to finance your upgrades.
When you really need to get those upgrades done quickly, getting a loan is often the best option you have.
Examples of urgent upgrades include green energy and water saving installations to reduce your water and lights bill, hurricane shutter installation to protect your property during the next storm or upgrading the kitchen that dates from the 1950’s.
In South Florida, a number of homeowners have opted for PACE (Property Assessed Clean Energy) loans, while others applied for private loans, such as Lightstream. There are pros and cons to both of these – in this article, we will specifically look at what each of these products are and what the downsides are for each one.
What is PACE?
PACE loans are loans aimed specifically at green property improvements, such as solar panel installations, water efficiency improvements and the like. These loans are easy to qualify for, since they aren’t linked to your personal credit score, but to the value of your property – you can get a loan for up to 15% of the value of your property.
Your property will be used as collateral for this loan. Do take note that PACE does not take into account what you can or can’t afford in your personal capacity – they only look at the value of your property and your property tax record.
A unique feature of PACE is that the loan doesn’t follow the applicant – instead, it follows the property. If you sell your property before your PACE loan is paid off, the next owner will have to take over the loan. Sounds great, right?
With PACE you can get all the financing for your home improvement project upfront – no cash down payments needed. Repayments are completed over a period of up to 30 years, depending on the initial loan amount. The interest rate is also fixed and the loan term is flexible, starting from 5 year upwards.
There are several programs that offer PACE financing, such as HERO (Home Energy Renovation Opportunity), Ygrene and CaliforniaFIRST.
Drawbacks of PACE
Before you jump in, you should know that there are some real downsides to PACE loans.
First off, the loan repayment isn’t done in the same manner as with a private loan. Payments are taken as part of your property tax payment, thus your tax bill will be higher.
Since you don’t pay that every month, you could be in for a nasty surprise, having to pay large sums of money a few times a year instead of smaller amounts every month. However, if you budget accordingly and you don’t incur any unexpected expenses, you should be able to meet these obligations.
Risk of Tax Foreclosure
PACE loans are linked to your property tax. If you don’t meet the payment requirements for your taxes, you risk losing your home due to tax foreclosure.
This could happen even while you are paying your mortgage installments regularly, since PACE is a super lien. This means that, in the event of foreclosure, they move into first position, standing in front of even your mortgage provider (more on that later).
Kroll notes that foreclosures on PACE-financed homes are just as common as on non-PACE financed homes.
PACE also has hefty fees upon initiation. The exact amount varies depending on the program you use for the purpose.
- HERO: 4.99% origination fee, $95 recording fee, $35 tax roll fee
- Ygrene: 3% origination fee, $795-$844 upfront program fee, depending on the county
- CaliforniaFIRST: fees vary based on the project and county. A typical example is 6% origination fee, $1280 program fee, $90 recording fee and $52.99 reserve fund fee.
Higher Interest Rates
PACE loans generally have higher interest rates than what you would be able to get with a private loan. This is especially true if you have a good credit score, since that would normally mean you would earn a considerable decrease in your interest rate.
PACE interest rates vary between 4.75% and 9%, depending on the project, county and program you use or funding.
Since PACE does not require an upfront down payment, the size of your loan is usually larger, adding to the burden of the higher interest rate.
If you are not eligible for a less expensive private loan, due to a poor credit history or low income, a PACE loan may be your only option. Before you sign, be sure that you understand the full implication, since these loans aren’t cheap.
Nearly Impossible to Sell or Refinance Your Property
PACE is a super-priority lien, which means that, in the event of tax foreclosure, they stand first in line for your property – even before your mortgage provider. For this reason, a prospective buyer may be hesitant to purchase your home before the PACE loan is paid off, even though the value was increased with all the upgrades you made.
Financiers are also hesitant to refinance homes with a PACE loan attached, since they risk losing their money in the event of tax foreclosure. Some programs, such as HERO, have agreed to forego their super priority lien status, charging a hefty $350 subordination transaction fee in the process.
Sometimes, there are ways around this, though. Some buyers may be willing to purchase the property for a slightly higher amount if you pay off the PACE loan in full before they take ownership.
Others may be willing to pay a little less for your home and take over the loan as well. Here, you can negotiate to find terms that suit both the buyer and the seller. Take note that the cost to the buyer is generally higher, so you may have to decrease your terms or asking price considerably.
What is Lightstream?
Lightstream is the virtual arm of SunTrust Bank, specializing in personal loans. The loan application is incredibly easy and is done online for consumer convenience. And they don’t charge any fees. No origination fees, late fees or prepayment penalties.
The loan’s interest rates are linked to your personal credit score – if the score is good, then you could qualify for very low interest rates. Repayment terms are flexible and allow as long as 12 years for a loan of up to $100,000.
The best part of Lightstream financing is the speed with which you get your payment – if you apply early morning, you can receive the full amount in the same day!
Drawbacks of Lightstream
Not Using Auto-Pay Increases Your Interest Rate
Lightstream offers interest rates as low as 4.99%, if you opt in for the auto-pay function. Here, the repayment amount is automatically deducted from your account at the end of each month. Choosing to forego this option and making the payment manually will increase your interest rate, though minimal, by 0.5%.
You Need Good Credit
If you have a good to excellent credit score (FICO score of 670 or higher) you will easily qualify for a Lightstream private loan. If your credit score is poor, you will either get a very high interest rate or you won’t qualify at all. This means that you will probably have to opt for a costly loan agreement elsewhere.
If your credit history doesn’t cover at least a few years, you will also not qualify for a Lightstream loan, or you will be awarded a high interest rate.
Added to this, you need proof of income and employment – if your income is too low, you also won’t qualify.
Hard Pull on Your Credit History
When you apply for a Lightstream loan, they will do a hard pull on your credit history. This could temporarily decrease your score, so you will have to be prepared for this and plan accordingly. It’s a good idea to get a free copy of your credit score before you apply, just in case.
Alternatively, NerdWallet offers a referral program where Lightstream will do a soft pull on your credit score.
There are considerable downsides to both PACE and Lightstream financing. The option that is best suited for you will depend on what you can afford along with your personal credit history.
If you opt for a PACE loan, you need to be prepared to stay in your home for a long time, since selling it will not be easy or simple. PACE loans are far more expensive than Lightstream loans, due to interest rates and fees charged.
This increased cost could be as high as double, depending on the fees that are charged – Lightstream has no fees, decreasing the cost of the loan considerably. For this reason, we recommend using Lightstream to finance your home improvement projects.
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