I have some clients that had a broken down A/C unit in their home. They live in the desert and had to make a decision quickly with Summer fast approaching. They came across the HERO program and found it as an easy way to pay for a brand new system with no money out of pocket. In working on their reverse mortgage loan, I have learned a few things about this loan program that should be understood by anyone considering this form of financing. The HERO, or Home Energy Renovation Opportunity loans are becoming a popular way to make energy efficient improvements to your home. Often these loans are used to add solar panels, insulation, new HVAC units or energy efficient windows to a home.
THE GOOD: HERO loans require ZERO down payments; one just needs to have equity in their home. Credit is not required. Repayment is done through your property tax payments over a period of 5 to 20 years. These payments MAY be assumable by a homebuyer. Sounds good right?
THE BAD: The rates and fees are high. A one-time admin fee of 6.95% is charged as a reserve against default. Depending on your credit, rates can be 11% or higher. Keep in mind that 30 year fixed rates are in the 4 to 5% range. Because this is a tax lien, it does not show up as a loan. If a buyer purchases a home with cash, they may be unaware of a large tax lien that they would be responsible for.
THE UGLY: HERO loans may be sold on the fact that they are easily assumable by the next buyer. In reality a HERO loan is actually considered a Tax Lien and as such it takes 1st position over a loan by Freddie, Fannie, FHA & VA backed loans. If the new buyer has one of these loans, they cannot purchase the home until the HERO loan is actually PAID off in full. Fannie, Freddie, FHA, & VA backed loans would also require you to pay off the HERO loan in order to refinance the home. A reverse mortgage requires the borrowers to pay off the HERO loan out of their own funds; they cannot use a credit card, or personal loan to pay it off. This would stop many from being able to eliminate their mortgage payment with this government sponsored loan.
Only you can decide if a HERO loan is right for you, but be sure to read the fine print and perhaps have a lawyer review the terms of your agreement before entering into any contract.