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Top Reasons to Get Out of a HERO Loan

HERO loans have a noble goal: reduce energy use and make a home more efficient. While well intentioned, these loans have become burdens for many homeowners. Now, many homeowners are wondering how to get out of a HERO loan.

There are solutions, but it all starts with having a clear understanding of the program…

What is a HERO Loan?

A HERO loan is simply energy-efficiency financing that is intended for projects that will help the home use fewer resources while conserving materials and energy. Standing for Home Energy Renovation Opportunity, this program is actually part of the Property Assessed Clean Energy (PACE) program, which helps support financing for efficiency projects all across the country. HERO is a specific section of the PACE program used in California and Missouri.

Funding from a HERO loan can be used to install solar panels, high-efficiency windows, or low-flow toilets. It can also be used for insulation, as well as many other projects that help your home consume less energy and fewer resources.

New water heater
HERO loans can be used for energy upgrades, such as the purchase and installation of a new water heater.

A HERO loan is not paid back in the typical fashion of a loan. Instead of regular installments made monthly, HERO loans are added as part of the tax burden in the house. This means that you won’t make monthly payments, but will instead pay an added amount to your taxes.

Although paid off as part of the taxes, the HERO loan take a first-lien status on your mortgage. This means that in the unfortunate event of a foreclosure, the HERO loan is first in line to be repaid. When a foreclosure occurs, the bank seizes your property and sells it at an auction in an effort to recoup their money. However, if there is a HERO loan, the bank has to let the provider of the HERO loan get their money first, then the bank can get their share of what’s left. Rarely will a bank recoup all of their money in a foreclosure, but an existing HERO loan will mean they recoup even less.

As we’ll discuss, this first-lien status means that homes with HERO loans are increasingly difficult to sell.

Top 3 Reasons to Get Out of a HERO Loan 

Interest Rates Can Be Higher

Perhaps the most striking reason to get rid of a HERO loan is the interest rates, which can be exceedingly high compared to other options for renovation and remodeling loans. These loans have interest rates that vary depending on numerous details, but it’s not uncommon to find HERO loans with interest above and beyond the typical rate. A story from the Los Angeles Times states that interest rates on PACE loans (which encompass HERO loans) can be roughly 6.5% to almost 8.5%. This is a particularly high rate and can make the HERO loan more expensive, despite the noble goals of energy efficiency.

Makes Selling the Home Difficult

When selling a house with a HERO loan, unless you find a 100%-cash buyer you have to find a buyer who can secure financing. The problem is that many banks and lending programs avoid writing loans on homes that have a HERO loan. Look at it from the lender’s perspective: if they write a loan on a home with a HERO loan and the borrower is unable to repay, the home may go through foreclosure. However, the HERO loan, not the mortgage, is the first one to be repaid, so bank may not be able to recoup as much money as they would have otherwise. For this reason, many banks avoid making loans that have these energy-efficiency loans.

Refinancing Becomes Difficult

For the same reasons that selling is difficult, refinancing is also a challenge. Say you have a home with a 15-year mortgage and want to refinance to a 30-year in order to have lower monthly payments. If you have a HERO loan, you would experience the same borrowing issues as buyers who want to purchase the property. You may actually find that lenders are unable or unwilling to write your loan, once again creating unexpected issues with your HERO loan.

How to Get Out of a HERO Loan?

Pay It Off as Soon as Possible

One of the most simple, and possibly the most obvious solution, is to pay off the HERO loan as quickly as you can. Working with your lender, you may be able to have the HERO loan removed through larger and accelerated payments, which will free you from the burden of the loan program and the tax lien on your property. This solution, however, requires additional money on your part, so it may not be easy to make the payments.

Refinance Out of the Program with an FHA Loan

If you have a HERO loan on your home, you may be able to get out of it by refinancing. Essentially, you would take out a loan from a bank and use the proceeds to pay off the HERO loan. You would then have a more manageable loan with reasonable terms, allowing you greater flexibility for repayment and unchaining your home when it comes time to sell. The only issue is that finding a refinance option can be difficult. In most cases, you’ll need to rely on either an FHA or a VA loan.

Sell the Home to a Cash Buyer

Although cash-only buyers are rare and difficult to find, there are buyers out there who may purchase your home and not use a loan. By purchasing the home with their own savings, they avoid the hassle of finding a lender who can overlook the barriers of the HERO program. This may not be the most ideal solution, as cash-only buyers are hard to find, but it may allow you to sell the home and finally get rid of your burdensome HERO loan.

Reliable Assistance for Your Borrowing Needs

If you want more information about getting rid of a HERO loan, contact the staff at San Diego Purchase Loans today. We’ll help you understand the details of HERO loans, and provide reliable information on various financing options. With a common-sense approach to mortgage underwriting, we can increase your chances of loan approval!


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Chad Baker, CrossCountry Mortgage   
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