The Pros, Cons, and Alternatives to HERO Loans

The average American homeowner spends about $2,000 per year on energy. Small efficiency upgrades like sealing windows and doors can put a dent in those costs, and larger renovations like solar installations can offer greater savings. But like so many things, you’ve got to spend money upfront to save money in the long term. That’s where solutions like the HERO loan can come in handy.

You may have heard the term before, but what is a HERO loan, exactly? Simply put, a Home Energy Renovation Opportunity (HERO) loan is a form of financing that helps eligible homeowners cover energy-efficient improvements like window and door installation, solar panels, roofing, and landscaping. It originated from the Property Assessed Clean Energy (PACE) program, which finances these kinds of upgrades for residential, commercial, and industrial properties.

The HERO home improvement program, sometimes referred to as the HERO solar program for solar panel financing, is specifically geared toward residential buildings and lets qualified homeowners borrow up to 15% of their home’s value. It’s important to note that the HERO loan program also differs from the VA home loan program known as “Hero Loans,” which are designed to provide home financing assistance to veterans and their families.

Advantages and Disadvantages of HERO Financing

Like any home financing option, there are pros and cons to using HERO loans. On the plus side, if a borrower is eligible for one of these loans, they receive 100% of the cost of qualified improvements (again, not to exceed 15% of the home’s value). The loans typically have terms of 5–25 years, and homeowners can get started through contacting their local government’s PACE program sponsors. Approval criteria tends not to be as restrictive as traditional financing choices, since it is based on the equity in your home rather than your credit score. The loan may also be able to be transferred if the homeowner sells their home before paying off the loan, provided that the buyer and their lender are amenable to it.

However, HERO loan payments are added onto your property taxes, and since they’re classified as a tax lien, they take precedence over any other loans on the home in case the homeowner defaults. For this reason, lenders can be averse to backing HERO loans. In addition, the payments frequently appear on the second property tax bill instead of the first, which can put many homeowners in a particularly precarious financial position if they’re left scrambling to find the money to cover the extra expenses. And while it depends on the lender, this issue can also come into play when the homeowner is trying to resell the home, as the lenders of prospective buyers often don’t want to play second fiddle to the HERO loan.

For example, California homeowner Elizabeth B., who paid off her HERO loan with a Hometap Investment, ran into issues trying to refinance: “It is harder to refinance because of the lien they have on your home,” she said.

HERO Program Qualifications

The 2017 tax reform bill also put a $10,000 cap on property taxes, so if your bill is particularly high, you may not be able to write off your loan payments. In terms of cost, HERO loans come with a one-time fee of 6.95%, and interest rates can be quite high, up to 9%. Finally, it’s important to note that HERO loans are currently only available to homeowners in California, Florida, and Missouri, so eligibility criteria is quite narrow.

Frequently Asked Questions About HERO Loans

Is HERO financing a good deal?

While any home financing option depends on your own situation and personal goals, a HERO loan can be a good fit for homeowners in eligible states who are seeking funding specifically for energy-efficient home improvements. If approved, they can receive 100% of the cost of these projects.

How do I get out of a HERO loan?

Before deciding on a HERO loan, it’s important to make sure you consider your options, as the inability to pay it off can put you in a tough spot. However, if you sell your home before paying back the loan, and your lender and the buyer are amenable to it, you may be able to transfer the loan.

Learn how Elizabeth B. used a home equity investment to pay off her HERO loan >>

What credit score is needed for a HERO loan?

Since HERO loans are based on your home equity rather than your credit score, this requirement is typically quite lenient compared to other financing solutions.

What are the terms of a HERO loan?

While the terms can vary by the specific loan, HERO loans usually allow eligible homeowners to borrow up to 15% of their home’s value and have a term of 5–25 years.

Is a HERO loan a lien?

Yes, a hero loan is considered a tax lien. As a result, it takes precedence over any other loans on the home if you default.

How are HERO loans paid back?

HERO loans are paid back along with a homeowner’s property taxes, with the loan balance usually appearing on the second tax bill. It’s also important to note that in addition to the loan balance, there is a one-time fee of 6.95% attached to HERO loan, in addition to ongoing interest.

HERO Loan Alternatives

If you are planning to make energy-efficient improvements to your home but don’t live in a participating state, there are a few other options. Many states have programs sponsored by gas and electric companies that provide free energy-saving services, such as Mass Save, Efficiency Maine, and NH Saves, to name a few. 

You can also tap into your home equity with a home equity loan, which provides a fixed interest rate and a lump sum payment. However, it can be challenging to meet the often restrictive approval requirements, and you’ll be responsible for the loan payments on top of your regular mortgage installments.

There is also a home equity line of credit (HELOC) that gives you flexibility in terms of how much and how often you can borrow money, but it too has downsides — a variable interest rate means that your monthly payments can fluctuate unexpectedly, and your lender can freeze your HELOC at any time if your credit score dips too low.

A cash-out refinance can also get you some extra funds and help you secure a lower interest rate on your mortgage. But since you’re taking out another loan on your home, you’ll have to pay the fees you dealt with the first time around when taking out your mortgage.

Another way you may be able to finance eco-friendly or energy-efficient upgrades is a home equity investment. You can receive cash in exchange for a share of your home’s future value to use for energy-efficient upgrades and replacements, all without monthly payments or interest.

The more you know about your home equity, the better decisions you can make about what to do with it. Do you know how much equity you have in your home? The Home Equity Dashboard makes it easy to find out.