Energy-efficient home renovations are rising in popularity, but many homeowners struggle to find the right type of financing to cover the cost of these projects.
One popular option, a Property Assessed Clean Energy (PACE) loan, allows homeowners to finance eligible projects and repay the cost through their property taxes.
The program comes with new considerations for homeowners. In this article, we’ll explain how PACE financing works, what it covers, and its pros and cons. We’ll also compare PACE loans to other financing options, such as home equity lines of credit (HELOC).
What is a PACE loan?
A PACE loan is a type of financing that helps homeowners pay for energy-efficient, renewable energy, and disaster-resilient home improvements.
Rather than making monthly payments like a traditional loan, the repayment amount is included as a special assessment on your property tax bill, increasing the total amount due each year until the loan is fully repaid.
How does PACE financing work?
PACE loans are designed to make sustainable home improvements more accessible by eliminating upfront costs.
Let’s look at the key characteristics of PACE loans.
Repayment terms
PACE loans are repaid through property tax assessments and are typically collected once or twice a year based on your local tax schedule.
The term can be up to 30 years, depending on the loan amount and local program regulations.
If the homeowner sells the property before the loan is fully repaid, the remaining balance may transfer to the new owner or it can be paid off early, which may come with potential fees.
Tax considerations
PACE loan payments are included in property taxes, but they are not typically tax-deductible.
Eligibility criteria
PACE financing eligibility is based on the property value and local program requirements, including:
Having sufficient home equity (typically at least 10-20% equity)
Being up-to-date on property tax payments and mortgage obligations
Being located in a participating area (not all states offer PACE loans)
Using the funds for approved energy-efficient improvements
Because PACE loans are secured by the property, they take priority over a mortgage in the event of default.
This may make some mortgage lenders hesitant about refinancing or approving loans for homes with existing PACE loans.
What does PACE financing cover?
While the exact availability of specific upgrades depends on state and local PACE programs, PACE loans typically cover the following types of upgrades:
1. Renewable energy systems
One of the most popular uses of PACE funding is solar financing, as the program helps homeowners install solar energy systems with minimal out-of-pocket costs.
This might include:
Solar panels
Solar batteries
Geothermal heating and cooling systems
2. Energy efficiency improvements
Energy-efficient home upgrades can reduce utility bills and improve indoor comfort.
Common improvements include:
High-efficiency HVAC systems
Energy-efficient doors and windows
Insulation upgrades
Smart thermostats and LED lighting systems
3. Water conservation upgrades
In regions prone to droughts or high water costs, PACE financing can be used for water-saving improvements such as:
Low-flow toilets, faucets, and showerheads
Drip irrigation and smart sprinkler systems
Drought-resistant landscaping
4. Disaster resilience and home safety
Some disaster-proofing measures qualify for PACE financing, including:
Hurricane-resistant doors and windows
Seismic retrofitting for earthquakes
Fire-resistant roofing and siding materials
PACE loans are not designed for general home renovations or non-energy-related projects.
Pros and cons of the PACE loan program
PACE financing can be beneficial in certain situations, but it also comes with potential risks and drawbacks that homeowners will want to carefully consider.
Let’s explore the advantages and disadvantages of the PACE program, including key benefits and some of the most common problems with PACE loans.
PACE loans pros
No upfront costs
Eligibility is based on home equity and property value, rather than strict credit requirements
Extended repayment terms (up to 30 years)
Potential energy savings and federal, state, or local tax incentives
PACE loans cons
Higher interest rates and fees over the life of the loan
Property tax burden and potential liens
Challenges when selling or refinancing
Limited availability and eligible projects
If you’re concerned about high interest rates, increased property tax bills, or future challenges with selling or refinancing, it may be worth exploring alternative financing options like HELOCs or home equity loans.
Alternatives to PACE loans for financing home improvements
PACE financing can be a useful way to fund energy-efficient home improvements, but it’s not the only option available.
Fortunately, there are several financing options that may offer more flexibility, lower interest rates, and fewer restrictions than a PACE loan.
Let’s look at the most popular alternatives.
Personal loans
A personal loan is an unsecured loan that provides a lump sum of money that can be used for any purpose, including home improvements.
Personal loans have fixed monthly payments and don’t require home equity, but because they are unsecured they often have higher interest rates than HELOCs or home equity loans.
FHA rehab loan
The FHA 203(k) loan is a government-backed mortgage that allows homeowners to finance home improvements along with a home purchase or refinance.
They offer fixed interest rates and structured repayment terms, and are only available for primary residences.
Cash-out refinance
A cash-out refinance replaces a homeowner’s existing mortgage with a new, larger loan, and allows them to take the difference in cash.
It provides a lump sum of cash that can be used for renovations, but it also increases your total loan balance and may extend the time it takes to repay the loan.
Home equity loan
Home equity loans are a type of second mortgage that allows homeowners to borrow a lump sum, fixed amount based on the equity in their home.
The funds can be used for any type of home improvement—not just energy-efficient upgrades—and offer lower interest rates than unsecured loans.
HELOC vs PACE loans
HELOCs are another way homeowners can access funds for home improvements using their home equity, but instead of a lump sum, they provide a flexible revolving line of credit. This allows homeowners to borrow as needed, only pay interest on the amount used, and to access funds again as they repay the balance.1
Unlike PACE loans, which must be used for specific projects, a HELOC gives homeowners full control over how they use their funds. Additionally, a HELOC does not place a tax lien on the property, making it a more flexible option for those considering refinancing or selling their home.
Is PACE financing right for you? Explore your options
Before committing to PACE financing, it’s important to carefully consider the pros and cons and compare alternative options.
If you’re looking for a flexible and cost-effective way to fund home improvements, a HELOC may be worth considering.
Figure’s HELOC allows homeowners to access funds at origination with a fixed rate¹. The application process is 100% digital, and borrowers can receive funding in as few as five days².
Additional FAQs about the PACE financing program
Where is PACE financing available?
Residential PACE financing (R-PACE) is currently only available in certain states including California, Florida, Missouri, and Ohio. Commercial PACE loans (C-PACE) are more widely available. Before applying, homeowners should check with their local government or a PACE provider to confirm availability in their area.
Are PACE loans tax deductible?
No, PACE loan payments are not tax-deductible in most cases. The interest portion of a PACE loan does not qualify as mortgage interest under IRS rules, meaning it cannot be deducted like traditional home loan interest. However, certain energy-efficient upgrades funded through PACE, such as solar panel installations, may qualify for federal and state tax credits, such as the solar investment tax credit (ITC).
