PACE Loans vs. Home Equity Financing in 2026: Why That Solar Assessment Gets Paid Before Your Mortgage

Start With What You Signed at the Kitchen Table

Every borrower situation is different, and my PACE conversations start the same way the rest of them do: with questions about what's on the tax bill, what's owed on the first mortgage, and what you plan to do with the house over the next few years. If there's a solar array on your roof and a new line on your property tax statement, you've either tried to refinance and been told to pay it off, or you're getting ready to sell and your agent flagged it. The mechanics behind that line are the whole story, so I'd rather start there than with the sales pitch you heard when the panels went up.

PACE stands for Property Assessed Clean Energy. The Consumer Financial Protection Bureau defines PACE financing as financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer. Freddie Mac's Seller/Servicer Guide describes the same thing from the lender's side of the table: an energy retrofit loan repaid through a property tax assessment. Both descriptions land on one mechanism. You agree to the improvement, solar panels or sometimes a new HVAC system or windows, a program administrator pays the contractor, and the county places a special assessment on your parcel that you repay on your property tax bill over a set term, as a fixed annual amount.

The contractor and the paperwork called it financing. The county collects it the way it collects your school taxes, and if your mortgage servicer escrows your taxes, the assessment flows into your monthly escrow payment at the next analysis, which is how a lot of homeowners first feel the real size of it.

Residential PACE has been active primarily in California, Florida, and Missouri, per the CFPB's rulemaking record. If you own property in one of those states, everything below applies to you directly. If you're somewhere else, the lien-priority lesson still matters, because the same logic governs any assessment that rides on a tax bill. At AmeriSave, when a PACE assessment shows up on a title commitment in a refinance file, the first thing our loan officers do is request the written payoff figure, because nothing else in that file can be sized until the number exists.

Why the Assessment Gets Paid Before a Mortgage Recorded Years Earlier

Lien priority normally runs on a simple clock. The first lien recorded against a property gets paid first from the proceeds of a foreclosure sale, the second lien gets what's left, and so on down the line. Your first mortgage was recorded the day you closed on the house, so under the normal clock it sits at the front of that line.

Property taxes break the clock, and PACE rides on property taxes. The CFPB's final PACE rule states that the liens securing PACE loans typically have priority under state law similar to that of other real property tax liens, which are superior to other mortgage liens on the property, including those that predated the PACE lien. The rule calls this a super-priority lien position. In a foreclosure sale, the PACE obligation is paid from the proceeds before any other lienholder sees a dollar.

Play that forward with real dates. Say you closed on your first mortgage in year one and added a $28,000 solar assessment in year fifteen. Under the normal clock the solar assessment would sit behind the mortgage. Under state PACE law it typically jumps to the front, ahead of a lender who has been in first position for fifteen years and never agreed to move. It's why your lender's reaction to a PACE lien has nothing to do with whether solar was a smart purchase for your house.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, put the concern in plain language when it first addressed these programs. FHFA found that PACE first-lien programs alter traditional lending priorities and create collateral-based lending rather than lending based upon ability to pay, and it flagged the absence of Truth in Lending Act and other consumer protections at the time. Roughly sixteen years passed before a federal rule closed that gap, and that rule is now in effect.

If you're wondering how a lender can care this much about a $28,000 assessment on a house worth many times that, think about the position from their chair. The lender's security depends on being paid first if things go wrong. An assessment that cuts in front of them, at a size they never underwrote and never approved, changes the collateral math on every loan in the pool. The two largest buyers of mortgages in the country wrote rules about it for that reason, and those rules are the next section.

What the Fannie Mae and Freddie Mac Guidelines Require Before a Refinance

Most conventional mortgages are sold to Fannie Mae or Freddie Mac after closing, and each has a written rule for PACE. Fannie Mae's Selling Guide states that it won't purchase mortgage loans secured by properties with an outstanding PACE loan unless the terms of the PACE program don't give the assessment lien priority over first mortgage liens. There's a narrow exception for legacy PACE loans that predate FHFA's directive and were attached to a mortgage Fannie Mae already owned, and even in those cases the lender handling the refinance has to first attempt to pay the PACE balance off through cash-out or limited cash-out proceeds. Any PACE balance that remains and sits subordinate gets counted in your debt-to-income ratio, or DTI, which is the share of your gross monthly income that goes to debt payments.

Freddie Mac's Guide is just as direct. For a Freddie Mac-owned mortgage on a property carrying a PACE obligation that results in or provides for first-lien priority, a no-cash-out refinance requires the PACE obligation to be paid in full from the new mortgage proceeds, and a cash-out refinance requires the same. The lender documents the PACE lien's first-lien status in the file and delivers the loan with a code that tells Freddie Mac the payoff happened.

For a conventional conforming refinance, the answer is yes, provided the refinance pays the assessment off. The new loan amount gets sized to include the payoff, the title company disburses it to the program administrator or the county at closing, and the assessment comes off the tax roll. What neither guide allows is refinancing around it and leaving it sitting in front of the new lender.

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From the processing floor, the payoff figure for a PACE assessment comes from the program administrator, and the written statement will spell out the remaining balance, accrued interest, and how any installment already placed on the current tax bill gets handled. Request that statement early. The loan officers I train at AmeriSave know to ask for it the same day they see the assessment on the title commitment, because a refinance can't close on an estimate, and I've seen files lose a week to a payoff statement nobody requested until the week of closing.

One boundary I need to draw clearly. Everything in this section describes Fannie Mae and Freddie Mac conventional guidelines. FHA and VA loans run on their own rulebooks, and this article doesn't cover them. If your current loan or your planned refinance is government-backed, your loan officer needs to check the applicable handbook rather than assume the conventional rule carries over.

The Rule That Finally Requires an Ability-to-Repay Check

For most of the time residential PACE has existed, no federal rule required anyone to check whether you could afford the assessment before it went on your tax bill. Congress eventually directed the CFPB to fix that in Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, and the CFPB's final rule under Regulation Z is now in effect. The rule does two things that matter to you. It applies Regulation Z's ability-to-repay requirement to PACE financing, so the company extending the financing has to make a reasonable, good-faith determination that you can repay the assessment before it's placed, using the same basic framework that governs a mortgage. It also applies the Truth in Lending Act's civil liability provisions to PACE transactions, which gives you a legal remedy when those requirements aren't met.

If you're considering a PACE assessment today, this is a real change in your favor. If you already have one, the rule governs new financing going forward and doesn't rewrite an assessment already sitting on your tax bill, so your path still runs through the payoff math in the next section. The gap between FHFA's first warning and the CFPB's rule ran roughly sixteen years, and a lot of solar assessments were placed in that window with no affordability check behind them. It's why I treat every existing assessment as something to price out rather than something to leave alone.

Pricing the Payoff: $28,000 of Solar on the Tax Bill vs. a Home Equity Loan

Let's say you have a $28,000 PACE assessment from a solar installation. Assume, for illustration, that it carries a 7.9% rate over 20 years with one payment a year on the tax bill. PACE pricing is set by each program and varies by state and administrator, so treat that rate as an assumption and pull your own from the assessment contract. On those inputs the annual payment comes to about $2,831, which works out to roughly $236 a month if your servicer escrows it. Over the full 20 years you'd pay about $56,613, of which $28,613 is interest. After five years you'd have paid about $14,153 and would still owe about $24,378, because a 20-year schedule retires principal slowly in the early years.

Now price the conversion. A home equity loan is a fixed-rate second mortgage with a set term, and it's the cleanest way to turn a tax assessment back into ordinary second-lien debt. Its fixed payment lines up against the fixed PACE schedule. A home equity line of credit, or HELOC, carries a variable rate indexed to the prime rate, which stood at 7.00% in the Federal Reserve's most recent H.15 release, so its payment can move with the index while the PACE schedule stays put. For the table, assume, again for illustration, an 8.5% fixed rate on the home equity loan, above that benchmark. On $28,000 over 20 years the payment is about $243 a month, $58,318 in total, with $30,318 in interest. Shorten the term to 15 years and the payment rises to about $276 a month while the total drops to $49,631, with $21,631 in interest.

At these assumed rates, the home equity loan over the same 20 years costs about $7 more a month and about $1,700 more over the term than leaving the assessment where it is. The 15-year version costs about $40 more a month and about $7,000 less in total interest than the PACE schedule. Your actual quote could land on either side of those figures depending on your credit profile, your combined loan-to-value ratio, or CLTV, meaning every lien against the home divided by its value, and where rates sit when you apply.

What the conversion buys you at any rate is position. The assessment comes off the tax roll, the new lender holds an ordinary second lien behind your first mortgage, and no buyer of your first mortgage has a rule against it. AmeriSave offers a fixed-rate home equity loan for conversions like this one, and the quote you want is the fully amortized payment on the payoff amount over the term you'd choose, so it lines up against a row in the table.

The cash-out refinance path replaces your first mortgage with a larger one and pays the assessment off out of the proceeds. On the $28,000 alone, at the 7.40% 30-year average from Freddie Mac's most recent weekly Primary Mortgage Market Survey, the added payment is about $194 a month, but stretched over 30 years it totals $69,792, with $41,792 in interest. The bigger issue is that a cash-out reprices your entire balance.

Maybe that doesn't fit for you because your first mortgage sits at a rate well below the current average. Assume a $300,000 balance at 3.25%: the payment is about $1,306, and a new $328,000 loan at 7.40% would run about $2,271, a jump of about $965 a month to clear a $28,000 assessment. But if your first mortgage is already priced near or above the current average, or you're carrying other debt you'd fold in anyway, one loan at one rate can make more sense than adding a second lien. The product comes out of your numbers, and those two situations point in opposite directions.

Selling a House With a PACE Lien on It

My wife sells real estate, so I hear the listing side of this at home, and a seller's first instinct is to treat the assessment like the panels themselves: something that transfers with the house and gets priced into the offer. Legally, that instinct is half right. The CFPB's rulemaking record confirms that a PACE obligation is tied to the property rather than the owner and transfers to a new owner at sale unless it's paid off.

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The other half is where deals stall. The same record states that most home buyers are unwilling to take on the remaining payment obligation for a PACE lien, or their mortgage lender prohibits them from doing so, and it points to the Fannie Mae and Freddie Mac guidelines that generally prohibit purchasing mortgages on properties with outstanding first-lien PACE obligations. So if your buyer is using a conventional loan, their lender is going to require the assessment be paid off at or before closing. The $24,378 remaining balance from the example above becomes a line on the seller's side of the settlement statement, paid out of your proceeds, and the contract gets negotiated around that fact whether you planned for it or not.

If you convert to a home equity loan before you list, the sale looks like any other sale with a second mortgage. Title orders the payoff, it's paid from proceeds at closing, and the buyer's lender has no super-priority problem to solve. If you leave the assessment in place, the payoff still comes out of your proceeds, but on the contract's timeline instead of yours, with the program administrator's payoff statement sitting in the file as a closing condition. The dollars are similar either way. What changes is your control over the timing, the cleanliness of the disclosure, and the buyer's lender's comfort with the file. If your equity is thin, knowing the payoff figure before you set a list price matters more than anything the panels save on the electric bill, because that figure decides how much you walk away with.

The Tax Question, Since Everyone Asks It

Homeowners ask whether the assessment is deductible as a property tax, since it's collected with one. IRS Publication 530 addresses this directly. You can't deduct amounts you pay for local benefits that tend to increase the value of your property, and a special assessment for a solar installation falls into that category. The only portion Publication 530 treats differently is any part of the assessment that's for maintenance, repair, or interest charges related to those benefits, and to claim that portion you have to be able to show the amount separately. In practice, the deductible slice, if there's one, depends on how your program breaks out the interest component on its statements.

I'm describing the IRS rule as written, and I'm a mortgage person rather than a tax professional. Take your assessment statement and your closing documents to someone who prepares returns for a living before you claim anything, and ask that same person how interest on a replacement home equity loan would be treated in your situation, because that's a separate rule with its own conditions and it sits outside what this article covers.

The Decision Rule: Price the Payoff Now If a Refinance or Sale Is Likely

The rule I give homeowners is simple. If there's a reasonable chance you'll refinance or sell before the assessment's term ends, get the payoff figure now and price the conversion now, while you control the timing. A 20-year assessment on a house you plan to hold for six more years is a payoff waiting to happen, and every guideline in this article says it'll happen at the least convenient moment if you let it. I spend most evenings in my garage rebuilding an old Nova, and the one rule that project has taught me is that you price the job before you pull anything apart. The same rule applies here.

The questions run in this order. What's the written payoff figure from the program administrator? What rate and balance is your first mortgage carrying, and how does that rate compare with the current 30-year survey average? How many years do you realistically plan to stay? What's your CLTV with the payoff added as a second lien, and what does your DTI look like with the new payment in place of the escrowed assessment? The product comes out of those answers. A first mortgage priced far below the market average points toward a home equity loan that leaves it untouched. A first mortgage priced near or above the average, or one you'd refinance anyway, points toward a cash-out refinance that clears the assessment and consolidates everything in one step.

I'd add the warning I give every borrower who tells me what their neighbor did. Your neighbor's solar assessment, first-mortgage rate, and plans for the house are a different file from yours, and shopping for a loan with someone else's bank account is how you end up in a product that fits their situation instead of your own. Run your own numbers, then compare. When you're ready, AmeriSave's loan officers can quote both paths off your actual payoff statement, and the questions we've scripted for those conversations start exactly where this section did: with the payoff figure, the first-mortgage rate, and how long you plan to stay.

The Bottom Line

A PACE assessment is repaid like a property tax, and under the state laws that govern these programs it typically takes priority over a mortgage recorded long before it. Fannie Mae and Freddie Mac won't take a loan sitting behind one, which is why a conventional refinance pays it off and why most buyers' lenders will require the same at sale. The CFPB's ability-to-repay rule now protects homeowners taking on new PACE financing, and it leaves existing assessments exactly where they sit.

Three numbers settle the rest of this: the written payoff figure from the program administrator, the rate on your first mortgage, and how long you plan to stay in the house. The payoff figure sizes the conversion. Your first-mortgage rate, set against the current 30-year survey average, decides whether the right vehicle is a home equity loan that leaves it alone or a cash-out refinance that replaces it, and your timeline decides whether to convert now or let the assessment run. Request the payoff statement in writing this week; the other two you already know. Once it's in hand, a loan officer at AmeriSave can price both paths off your actual statement instead of the assumptions in my table, and you'll walk into a refinance or a listing with the number already in hand rather than waiting for someone else to ask for it.