What Are HERO Loans And How Do They Work?

Homes built after 2000 using almost the same amount of energy as older homes, despite being around 30% largerHowever, every year the average household releases more than twice as much CO2 emissions than the average car.  Using less energy is good for the economy, the planet, and your pockets. In the United States, opting to use energy-efficient appliances alone can save a household $500 per year on utility bills. 

Energy-efficient home improvements like heating and cooling, solar, windows and doors, landscaping, and roofing can save households even more. Within approved communities, energy-efficient home improvements can be made through HERO loans.

Keep reading for a guide that explains this home energy renovation opportunity!

What Is A HERO Loan?

A HERO loan is a home energy renovation opportunity program. To better understand the HERO loan program, we’ll first explain the PACE program, from which the HERO loan originated.  The Property Assessed Clean Energy Program (PACE) is a program that finances energy-efficient upgrades for commercial, residential, and industrial properties. It works by local governments providing initial funds for building and project owners to install renewable energy systems and enact energy-efficient projects.

Over time, property owners repay their PACE loans.

How Does A HERO Loan Work?

The Home Energy Renovation Program (HERO) works similarly to a PACE loan, but with an added twist. HERO loans are designed and divvied out specifically for residential upgrades. Plus, they’re repaid through property taxes.

The financing gets repaid through annual property tax payments made by the property owner. The local county collects them, and in some cases, they get passed on to a new property owner.   It’s crucial to get clarification on the pay-off terms of a HERO loan before moving forward. Less frequent, but larger payments are sometimes too much for borrowers to handle.

Who Qualifies For A HERO Loan?

HERO loan eligibility is based on household income, home equity, debt obligations, and the upgrades you’d like to finance.  The criteria can vary by jurisdiction, though. Residential properties, including up to 4 units, may be eligible for the HERO program.

Currently, the HERO loan program is available in over 700 communities in states Missouri, California, and Florida. Product eligibility depends on state requirements, and only water-efficient, energy-efficient, and hurricane protection upgrades may qualify for the HERO loan.

Once the program deems a property owner eligible, HERO finances 100% of the costs associated with purchasing and installing those energy-saving products. Any interest paid on the principal balance can have tax benefits, not unlike a mortgage.

If you opt to sell your property soon after making improvements through the HERO loan program, you don’t always have to pay off the loan first. The loan is technically attached to the property, so you should find the right home buyer willing to pay off the remaining loan in return for the benefit of the energy savings.  The home improvements can help you save significantly on monthly energy bills.

How To Pay Off A HERO Loan

Sometimes lenders are hesitant to write HERO mortgages because the HERO loan takes precedence over the mortgage. For example, if a homeowner has a financial issue and can’t pay their usual bills, the mortgage company will always have to wait until the government (HERO loan) gets paid back first.

HERO and PACE loans are like any other loan in that they must be paid back.  You could pay your HERO loan monthly, like most other loans. Many HERO and PACE lenders require paying your loan in large chunks, once or twice per year.

If you bought a property with a HERO loan and are unsure how to get started paying it off, request a pay-off statement and negotiate a monthly amount that you can afford to pay.

How To Sell A House With A HERO Loan

Enlisting in a home energy renovation opportunity program is admirable and smart. It helps the economy and the environment go green, but you’ll also save significantly in the long run with lowered home energy costs.

Sometimes property owners must sell their homes before they finish paying off a HERO loan, though. There are many options for doing so. Some opt to pay off a portion of the loan and transfer the rest to the new homeowner.

Sometimes restrictions reduce the marketability of the home. For example, while a prospective homeowner may be excited to purchase a home that boasts energy-efficient characteristics and products, they might not want to pay for years to come. Plus, many lenders will be hesitant to divvy out mortgage loans as their repayment will fall second in line with HERO loan payments.

Talk to your broker to see what can be done. Maybe you and a prospective buyer agree to split the remainder of the HERO loan. Maybe you take out a low-interest loan to pay off what you owe, which removes that loan lien from the house you’re trying to sell.

Can You Refinance With A HERO Loan?

Until recently, if a property owner had an existing energy-efficient loan through PACE or HERO, there was no option to refinance a mortgage.  The Federal Housing Administration (FHA), for example, used to prohibit lenders like Freddie Mac and Fannie Mae from purchasing loans with a HERO or PACE loan setup. The Clean Energy Savings For All Initiative changed the rules by mandating that the VA and FHA change their requirements.

Now, a homeowner with an existing PACE or HERO loan is allowed to refinance their mortgage. Lenders are now allowed to lend and help you buy a home that already has a PACE or HERO lien on the title.  Many lenders choose not to participate in the initiative, though, which is why some homeowners opt to take out personal loans instead.

How To Check A HERO Loan Balance

If you’re unsure of how to make a payment or want to check your balance, you can request a pay-off or pay-down statement by logging into the Balance Information Center.  You can view your estimated balance, request a pay-off or pay-down statement, and get a detailed statement of the loan history.

Are HERO Program Loans Tax Deductible?

HERO payments are separately stated, even though they’re included in the property tax bill. They are not deductible as property tax.  However, the piece of a HERO payment that constitutes as interest is typically deductible as home mortgage interest.

HERO vs. HIRO

It’s a common mistake to intermix HERO loans with Fannie Mae’s High LTV Refinance Option or HIRO loan, but they are two different loans entirely. In 2018, the HIRO mortgage program replaced the Home Affordable Refinance Program (HARP). The program works to help underwater homeowners.

If you have a loan-to-value (LTV) ration that’s above 97% and you also meet the program’s eligibility requirements, Fannie Mae’s high LTV mortgage might be worth the consideration.  Regardless of which loan you’re looking for, choosing the right lender makes all the difference.

Pros and Cons of the HERO Loan Program

If you live in a community that offers HERO financing, you can apply for financing online and don’t necessarily require a credit check for approval.

Take a look at some additional pros of the HERO program:

  • If approved, you’ll receive 100% financing for purchases and renovations
  • The HERO loan or a portion of it can sometimes be transferred to a new owner
  • You’ll start saving on your utility bills
  • You can make unscheduled payments to your remaining balance whenever you like
  • You may qualify for potential tax credits
  • The contractors you hire and appliances you purchase are guaranteed to provide a benefit

Here are some cons of the HERO program:

  • Repayment options are not always affordable
  • Some contractors get referral bonuses
  • Payment shock (from large lump sum payments)
  • There are interest costs
  • There are limits to how much you can borrow
  • Increased risk of foreclosure
  • It can be challenging to sell your home with an attached HERO loan
  • It can be difficult for buyers to secure financing

HERO Loans Enable Homeowners to Go Green and Save Money

Do you live in a community that offers HERO loans?   HERO loans could be an excellent option for homeowners who want to finance 100% of their energy-saving renovations and appliance purchases. Plus, going green is great for the economy, the environment, and saves you money in the long run.

Be sure to do your research and get familiar with the terms of a loan before taking one out. Prepare yourself for those lump-sum payments if your HERO loan requires bi-yearly or yearly payments.

Check out how more information on loans at LowerMyBills!

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