The HERO Program is a Property Assessed Clean Energy Program provided by the Federal Government to provide financing for energy-efficient, water efficient, and renewable energy products to home and businesses in approved communities, specifically in California.
This program was developed in 2010 in Riverside County California. We became the first region to offer this program and is now available to over 85% of people living in California. But what does this really mean in everyday terms?
How it works:
If you are eligible, the HERO Program will allow 100% financing of the cost to purchase and install eligible energy-saving products to your home. The repayment of this loan is built into your property taxes. The interest paid on your property taxes may also offer tax benefits. If the property is sold before this loan is repaid, it’s usually passed on to the new property owner. It’s basically a loan to allow you to make energy-efficient improvements to your property. Eligibility requires homeowners to have at least 10% equity in their home, are current with the property taxes and mortgage payments, have not recently filed for bankruptcy, and the products are approved for this type of loan.
Now, this all sounds well and good but there can be disadvantages and pitfalls to this type of program.
Hidden Risks and Pitfalls
This is a loan against the property meaning that it is considered a tax lien and it takes the first priority if you go into default. This program gets paid before any other creditors including the lender that holds the original mortgage on the home.
Why is this important? That first position is so important that FHA prohibits Fannie Mae and Freddie Mac from purchasing mortgages with these types of loans. Which means, you may not be able to buy a house that has this type of loan already attached to it or you may not be able to refinance with these types of loans if you choose this type of program.
Another drawback is that these loans don’t always show up on your first tax bill. They typically come with the second tax bill, so many homeowners are finding themselves having to pay more to make up for that first missed payment. (A very strange way to do it, if you ask me).
Also, even though the HERO loan is assumable to the next homeowner, most banks will not lend on a property until that debt is settled prior to closing.
Finally, the financing fee for this type of loan can be very expensive. There is a one time 6.95% administration fee and a yearly interest rate of up to 11% or maybe more.
You can see that this can cause an unfortunate ripple effect on your property. If you choose to go with this loan you may have a difficult time selling the loan if you haven’t paid it off in full. It may take longer to find a buyer on your property and it could result in a lower sales price.
Also, in my own experience, I have been refinancing many people who are experiencing monthly mortgage payments jumping up, by many hundreds, and as high as $1000 a month EXTRA, due to their HERO Loan.
The bottom line is to figure out if this program is really worth it. There are a lot of utility companies that may offer discounts on energy bills should you install an Energy Star appliance or choose energy-saving materials or equipment. It may be better to check into those programs rather than tying yourself up with the HERO Program.
The Good – Hero sells “Get home improvements done… don’t pay now”…
The Bad – The Interest rate & fees they charge are horrendous and contractors they refer you to are often inflated…
The Ugly – Within a year they will hike up your tax base and you will have to start paying all the charges, increasing your mortgage payment by HUNDREDS per month…
At the end of the day, I want to help folks refinance out of their HERO Loans.
If you have questions on this program or maybe other options that could be more beneficial to your situation, please give me a call. I’d love to discuss the pros and cons to this, and other programs that may be available to you to help save you on your monthly mortgage payment.