HERO LOANS...WHO’S THE HERO??

 

Maybe you’ve heard of them.  HERO loans.  They sound noble, trustworthy, and safe.  But they’ve turned out to be nothing like a hero; they’re more like a villain.  The biggest victims turn out to be the elderly, though anyone can be a victim of them.

HERO loans are a product of a company called Renovate America based in San Diego.  If you’re here, you’ve likely heard of these loans.  They’re a loan product under the category of the PACE program.  PACE stands for Property Assessed Clean Energy.  These loans are made to make energy efficient improvements.  Anything from solar electric systems to artificial turf qualify.  As long as energy is being saved, a homeowner can get a PACE loan.  These loans are available to commercial property owners and for residential rentals. 

Why are property owners choosing PACE loans?  Anyone who owns a property will qualify.  No appraisal or income requirements exist with PACE loans.  As long as you’re the owner of the property and the improvements are for the property you own (as opposed to another property), you can get a loan.

Why are they so easy to get?  Ah, here’s the tricky part.  The loans attach to your property taxes, which means they’re in a superior position to your mortgage.  If you said, “HUH?”, you’re not alone.  Let me explain this way…

If you stop making payments on your house – mortgage, property taxes, and HOA (if you have one) – the county, your mortgage company, or HOA can foreclose on you.  These entities may not need to pay each other, though.  Here’s how they rank:

  1. Property taxes
  2. Mortgage
  3. HOA

If the county forecloses on you because you don’t pay your property taxes, the HOA and mortgage company lose out.  If your mortgage company forecloses on you, they’ll have to pay your property taxes but not your HOA dues. If the HOA forecloses, they’ll have to pay your back property taxes AND your mortgage. 

A PACE loan, because it attaches to your property taxes, will always get paid off, no matter who forecloses.  So the risk is low to the PACE loan company.

Why are they so bad, though?  There are a few reasons:

  1. You cannot refinance. PACE loans remain ahead of a mortgage.  Mortgage companies don’t like that. While PACE loan companies will say they’re glad to subordinate (go below) the mortgage, mortgage companies know that’s not how PACE loans work. The PACE loan might be glad to subordinate, but they jump right back up above a mortgage after the refinance is done.  So mortgage companies will say NO.
  2. You can’t sell without paying off the PACE loan.  Buyers of homes with PACE loans can’t get financing, just like homeowners can’t refinance.  So the sellers of properties have to pay off the PACE loans through escrow.  The PACE loan company will say their loans will go with the property to the new buyer, which is true, they don’t tell homeowners that mortgage companies won’t lend with PACE loans in place. 
  3. PACE loans have high interest rates.  I just saw one for 8%.  They also may have payoff penalties, which I saw on one of $2,400. 
  4. Property tax bills skyrocket!  PACE loan payments are made with property taxes, so the payment is made just twice a year.  They’ll make property taxes go up tremendously! 

Here’s a real story.  A 78-year-old lady gets talked into solar, artificial turf, a new heater and air conditioner, and a new roof.  A dishonest company convinced her to sign the loan documents.  Three PACE loans later and she is $140,000 in debt.  Her property taxes went up from $900 per year (she’s owned her home for 40 years) to $18,000!  She makes $4,000 per month and owes $280,000 on her mortgage.  Total debt is over $440,000.  She couldn’t pay her property taxes, so her mortgage company did.  Then they increased her monthly payment from $1,300 to $3,100!  Not only does she have to move, she won’t make anything when her house sells and it might actually be a short sale.  And there’s nothing she can do.

Safeguards for you and others…

  1. If you’re considering a PACE/HERO loan, do your homework.  Make sure you can make your new property tax payment.  If you have an impound/escrow account with your lender, find out exactly what your new monthly payment will be.
  2. Spread the word, especially to seniors.  Don’t let them get these loans unless they know exactly what they’re doing and know exactly what their new property tax payment will be.
  3. Consider alternative financing.  If you need to get a loan, look also into home equity loans, lines of credit, cash-out refinancing, and others.
  4. CALL ME!  Let me go through these details with you or those you know.

 

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