The process to evaluate various financing/payment options for a home improvement project can be burdensome and time consuming. We have shopped PACE financing against a popular traditional financing method, a Home Equity Loan, to bring you a side by side comparison and insights for you to consider as you evaluate PACE financing as an option to pay for your home improvement project.
Homeowners seeking home improvement financing often believe that a strong credit score will get them the most favorable financing terms for a Home Equity Loan – lowest rates and longer repayment terms. While this is true to a certain extent, there are other factors that Home Equity Loan financing companies consider that are just as important as the applicant’s credit score to determine the financing terms, such as:
Loan-to-value (“LTV”) ratio: LTV is the amount of equity tied up by the primary mortgage or other primary property-secured debt. The formula to determine the LTV is simple: Outstanding balance on the primary mortgage or property-secured debt divided by the home’s market value = LTV. Borrowers with an LTV of 80% or less generally may have an advantage to receive the most favorable financing terms.
Combined Loan-to-Value (“CLTV”) ratio: CLTV is the amount of equity tied up by a mortgage plus all other existing and the potential new property-secured debt (such as a home equity loan). Financing companies use the CLTV to determine a borrower’s risk of default when more than one loan is in place. In general, traditional financing companies are more likely to approve a borrower with a high credit score and low debt-to-income for a CLTV of 80 percent and above. Loans that exceed the 80 percent CLTV threshold are more likely to have a higher interest rate than those below the 80 percent CLTV.
Debt-to-Income (“DTI”) ratio: DTI is the amount of debt a borrower has in relation to their gross monthly income (income before taxes and other deductions). This does not include living expenses or other everyday items. Traditional financing companies use a DTI ratio to calculate the borrower’s ability to repay the financed amount. Borrowers with a 36 percent or lower DTI usually have an advantage to receive the most favorable financing terms.
Now that you have a better understanding on how each of these variables can affect the financing terms you may get for a Home Equity Loan, let’s look at our shopper’s scenario.
FICO score: 740-749 | Loan-to-value (LTV) ratio: 80% | Finance amount needed for a new roof: $44,000.
PACE financing v. a Home Equity Loan Comparison
At a first glance our shopper seems to have a strong profile that would result in obtaining the most favorable rates. However, our shopper was not able to obtain an interest rate for a 25-year Home Equity Loan below 8.89 percent due to the CLTV being above 90 percent.
The interest rates for PACE financing are not dependent on the CLTV which means that homeowners can have peace of mind knowing that their rate will not fluctuate based on their CLTV or their FICO score.
When we put the Home Equity Loan against PACE financing the monthly payment amount does not seem to be very different between the two options; however, over the life of the financing term (25-years) our shopper would save over $7,000 in interest by using PACE financing over a Home Equity Loan.
In conclusion, while PACE financing may not be the best option for everyone it is clear that it is a competitive financing option and a strong contender for traditional home improvement financing, in this case a Home Equity Loan. Even those homeowners who have a strong credit profile might be better off using PACE financing for their eligible home improvements than a Home Equity Loan.
Click here or call 866-891-6879 to contact an authorized PACE provider in your area. An expert PACE financing advisor will answer all of your questions and provide you with a FREE and No-Obligation quote.
Interest Rate: Interest rates as of December 6, 2019. The interest rate used for PACE financing is based on the base rate offered by a Master registered contractor for a 25-year repayment term. Available interest rates depend on your project size and repayment term. Available interest rates range between 6.69% and 8.49%. The interest rate used for the Home Equity Loan was advertised by SpringEQ loans on www.bankrate.com and it was based on the credit score and LTV characteristics of our shopper mentioned above. The use of the SpringEQ trade name or trademark is for identification and reference purposes only and does not imply any association with the trademark holder of their product brand.
Expected Fees: The fees displayed do not include pre-paid interest between the time of closing and the first payment due. The fees in the total include but are not limited to: origination fees, recording fees, etc. The fees for the Home Equity Loan are based on the fees SpringEQ quoted to our shopper.
Monthly Payment: The monthly payment represented for PACE financing is only for illustrative purposes, the annual payment of $4,358.96 was divided by 12 monthly payments. The payment for PACE is due under the same schedule as the property taxes are (annual or biannual).
Interest Savings: The total interest paid over the life of the PACE financing are $60,375.82. The total interest paid over the life of the Home Equity Loan are $67,739.48. These calculations include the amount of pre-paid interest between the time of closing and the first payment due.
Comparison provided only to illustrate impact of CLTV. Interest savings not guaranteed. Actual results may vary. PACE financing is subject to credit approval. Underwriting requirements and restrictions apply. PACE financing is secured by a property lien until repaid in full. PACE financing may be required to be repaid upon refinance or sale. Homeowners should perform due diligence before selecting a home improvement contractor. PACE financing is private financing that must be repaid in full. PACE financing is not a government subsidy.