What PACE Loans Are and Why This Matters
PACE stands for Property Assessed Clean Energy. These loans help homeowners finance energy improvements like solar panels, new windows, or HVAC upgrades. The loan gets repaid through an assessment added to your property tax bill.
Here's why PACE loans complicate refinancing: they often take priority over your mortgage. When you got your original mortgage, your lender expected to be in first position if you defaulted. A PACE loan can jump ahead of them in line.
Say you installed a $25,000 solar system using PACE financing two years ago. Now you want to refinance your mortgage to get a lower rate. Your new lender won't close the loan while that PACE obligation sits in first position ahead of them.
How No-Cash-Out Refinances Work with PACE
For a no-cash-out refinance, Fannie Mae allows you to pay off the PACE loan with your new mortgage proceeds. But several conditions must be met.
Your existing mortgage must be owned or securitized by Freddie Mac. This isn't something you can easily verify yourself. Your loan servicer can tell you, or your new lender will research this during the application process.
The PACE obligation must be paid in full at closing. You can't keep part of it and pay off part of it. The entire balance gets rolled into your new mortgage amount.
Your new loan must follow all the standard no-cash-out refinance rules found in Fannie Mae guidelines [[4301.4]]. This means your loan amount can't exceed your current mortgage balance plus closing costs and the PACE payoff.
Required Documentation for PACE Payoffs
Your lender needs specific evidence that the loan being paid off is actually a PACE obligation. This documentation proves the loan was used for energy improvements and is being repaid through property tax assessments.
Acceptable documents include the original PACE loan agreement, property tax statements showing the PACE assessment, or verification letters from the PACE administrator. The paperwork must clearly show the loan's purpose and repayment structure.
Your lender will also need a current payoff statement from the PACE administrator. This shows the exact amount needed to satisfy the obligation at closing.
The loan file must demonstrate that the PACE loan results in or provides first lien priority. This typically comes from the original loan documents or a title report showing the lien position.
Cash-Out Refinances with PACE Loans
Cash-out refinances follow different rules. You can take cash out while paying off a PACE loan, but the requirements depend on the PACE loan's lien priority.
If your PACE loan has first lien priority, it must be paid in full with the mortgage proceeds. You can't leave any balance outstanding. The cash-out refinance must follow all standard guidelines in [[4301.5]].
Say your home is worth $400,000 and your current mortgage balance is $250,000. You have a $30,000 PACE loan in first position. You could do a cash-out refinance up to 80% of value ($320,000), pay off both the mortgage ($250,000) and PACE loan ($30,000), and take $40,000 in cash.
Why Fannie Mae Requires PACE Payoffs
The lien priority issue drives these requirements. Mortgage investors need predictable lien positions. When a PACE loan can jump ahead of the mortgage, it creates uncertainty about recovery in foreclosure.
By requiring PACE payoffs, Fannie Mae ensures the new mortgage maintains clear first lien priority. This protects both the lender and the mortgage investor who ultimately buys the loan.
The energy efficiency aspect also matters. Fannie Mae supports energy improvements but wants them financed through conventional mortgage channels rather than competing lien structures.
Common Problems and Complications
PACE administrators sometimes move slowly on payoff requests. Start this process early in your refinance timeline. A delayed payoff statement can push back your closing date.
Some borrowers discover their existing mortgage isn't owned by Freddie Mac, which blocks the no-cash-out option. You might need to do a cash-out refinance instead, which typically has higher rates and fees.
Title issues can emerge if the PACE lien wasn't properly recorded or if there's confusion about lien priority. Your title company will research this, but problems here can delay or kill the transaction.
PACE loan balances might be higher than expected due to accrued interest or fees. Get an updated payoff statement close to your closing date to avoid surprises.
Special Programs for Energy-Efficient Homes
Homes with energy improvements might qualify for Fannie Mae's GreenCHOICE mortgage program under guidelines [[4606]]. These loans can offer benefits like reduced mortgage insurance or expanded debt-to-income ratios.
The irony is that paying off your PACE loan might actually help you qualify for better mortgage terms through these energy-focused programs. Your lender can evaluate both options during the application process.
Working with Your Lender
Tell your lender about any PACE loans upfront. Don't wait for them to discover it during title review. Early disclosure helps them structure your loan correctly and gather the right documentation.
Ask whether your existing mortgage is Freddie Mac-owned before assuming you can do a no-cash-out refinance. This information affects your loan options and pricing.
Request PACE payoff statements early in the process. These can take weeks to obtain, and you'll need current figures for your closing.
References
For the official guidelines, see 4301.8: Refinance of Mortgages secured by properties subject to an energy retrofit loan in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
For the purposes of the Guide, a Property Assessed Clean Energy (PACE) or PACE-like obligation (either referred to as a “PACE obligation”) refers to any energy retrofit loan that is:
Used to finance energy efficiency improvements, and
Repaid through a property tax assessment
For the “no cash-out” refinance of Mortgages secured by properties subject to PACE obligations that result in or provide for First Lien priority and where the PACE obligations are paid off with the Mortgage proceeds, the following requirements apply:
The new refinance Mortgage must be originated in accordance with the requirements of
Section 4301.4
for “no cash-out” refinance Mortgages
The Mortgage being refinanced must be owned in whole or in part or securitized by Freddie Mac
The PACE obligation must be paid in full
The Mortgage file must include evidence that the obligation being paid off is a PACE obligation that results in or provides for First Lien priority
Investor Feature Identifier
valid value “H61” when delivering a Freddie Mac-owned “no cash-out” refinance Mortgage used to pay a PACE obligation. See
Section 6302.16(b)(ii)
for more information.
For the cash-out refinance of Mortgages secured by properties subject to PACE obligations and where the PACE obligations are paid off with the Mortgage proceeds, the following requirements apply:
The new refinance Mortgage must be originated in accordance with the requirements of
Section 4301.5
for cash-out refinance Mortgages
If the PACE obligation results in or provides First Lien priority, the PACE obligation must be paid in full with the Mortgage proceeds
Mortgages secured by properties that are energy efficient and are also subject to PACE obligations may be eligible for purchase under the provisions of
Chapter 4606
for GreenCHOICE Mortgages
®
.
