"Can I Refinance a Home With a PACE Assessment on the Tax Bill? What Has to Happen to It First"

Your property tax bill has one more line on it than your neighbor's. The county is there, the school district is there, and then there is the solar system you had put on the roof a few years ago, or the heat pump, or the new windows. You have been paying for that work a little at a time, right along with your taxes. Now you would like to refinance, maybe for a lower payment or to take some equity out, and you are wondering what happens to that extra line.

Yes, you can refinance a home with a PACE assessment, and Freddie Mac, Fannie Mae and FHA each have a way for the new loan to pay the assessment off at closing. They differ on when it has to be paid off: Freddie Mac when it is first in line ahead of the mortgage, FHA always, and Fannie Mae depending on how it is structured.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. An assessment on the tax bill is a different thing from a solar lease or a loan from the panel company. If your panels came with a lease, a power purchase agreement or a UCC filing, checking the solar contract on a home with panels covers that paperwork. This article is about the assessment your local government collects with your taxes.

The PACE assessment on your tax bill, in the guides' own words

PACE stands for Property Assessed Clean Energy. Freddie Mac's Section 4301.8, revised 09/04/2024, defines a PACE obligation as any energy retrofit loan that is "Used to finance energy efficiency improvements" and "Repaid through a property tax assessment." Freddie Mac also counts what it calls "PACE-like" obligations under the same rules.

FHA's Handbook 4000.1 at II.A.1.b, revised 06/27/2025, describes how the payments work. The repayment "is collected in the same manner as a special assessment tax," by the local government, and the obligation is generally secured against the home the same way. FHA also says that if the home is sold, "the obligation will continue with the Property," so the next owner takes over the payments.

That is why a refinance lender pays close attention to it. Some PACE obligations are set up to be paid first, ahead of the mortgage, if the home is ever sold to settle what is owed on it. Freddie Mac's word for that is "First Lien priority," and a lender making you a new first mortgage expects to be first in line.

Freddie Mac: paid in full when the assessment is first in line

Freddie Mac's Section 4301.8 gives two routes, one for each kind of refinance. A "no cash-out" refinance is Freddie Mac's name for a rate-and-term refinance, where the new loan replaces the old one and you take out little or no cash. If the difference is new to you, how a rate-and-term refinance differs from a cash-out refinance lays it out.

The no-cash-out route

Freddie Mac's no-cash-out section, Section 4301.4, revised 02/04/2026, lists paying off "a Property Assessed Clean Energy (PACE) or PACE-like obligation" as an allowed use of the loan. It sends the lender to Section 4301.8 for the rest. For a PACE obligation that has first-lien priority and is being paid off by the new loan, that section sets four requirements:

• The new loan follows the standard no-cash-out rules in Section 4301.4.
• Your current mortgage has to belong to Freddie Mac. That means Freddie Mac owns it, or it is one of the loans pooled into the mortgage-backed securities Freddie Mac issues. The guide's words are "owned in whole or in part or securitized by Freddie Mac."
• The PACE obligation is paid in full. A partial payoff does not meet the rule.
• The loan file shows what the obligation is. It needs evidence that the debt being paid off is a PACE obligation that "results in or provides for First Lien priority."

The second requirement decides whether this route is open to you. If Freddie Mac does not own your current loan, the cash-out route below or another agency's rules may still fit.

The cash-out route

For a cash-out refinance, the new loan follows Freddie Mac's cash-out rules in Section 4301.5. Section 4301.8 adds one sentence: "If the PACE obligation results in or provides First Lien priority, the PACE obligation must be paid in full with the Mortgage proceeds."

Freddie Mac's section ties the payoff requirement to first-lien priority. It says nothing further about a PACE obligation without that priority, so on a file like that, the lender reads the rest of the guide. The section also mentions that an energy-efficient home with a PACE obligation "may be eligible" under Freddie Mac's GreenCHOICE Mortgages chapter, Chapter 4606.

Fannie Mae: the energy work has to be documented

Fannie Mae's Selling Guide section B2-1.3-02, "Limited Cash-Out Refinance Transactions," revised 10/08/2025, covers Fannie Mae's version of a rate-and-term refinance. Normally it only lets the new loan pay off a second lien that was used to buy the home. Then it carves out an exception "for paying off a Property Assessed Clean Energy (PACE) loan or other debt (secured or unsecured) that was used solely for energy-related improvements."

So under Fannie Mae, a PACE payoff can be part of a limited cash-out refinance even though the PACE money did not buy the home. The lender has to document that the money went to "permissible energy-related expenses," and the section names what counts: "copies of invoices or receipts to evidence funds were used for energy improvements." It adds that "A copy of an energy report is required in many cases," and points the lender to its HomeStyle Refresh section, B5-3.3-01, for the details.

Taking cash out with a PACE assessment on the home

Fannie Mae's cash-out section, B2-1.3-03, revised 12/10/2025, lists a PACE situation among its ineligible transactions. For "certain transactions on properties that have a Property Assessed Clean Energy (PACE) loan," a refinance is not eligible as a cash-out refinance if you "have sufficient equity to pay off the PACE loan but choose not to do so."

So if you are taking cash out and have the equity, the plan may need to include paying the assessment off. Fannie Mae's PACE section, B5-3.4-01, says which transactions that covers.

Some PACE structures can stay

Fannie Mae's subordinate financing section, B2-1.2-04, revised 08/06/2025, says "eligible subordinated or unsecured PACE structures are permitted" under that same B5-3.4-01. Fannie Mae's guide says plainly that some assessments can stay on the home after a refinance. Whether yours qualifies depends on how your program set it up.

FHA: the assessment has to be paid off

Section II.A.1.b says: "Properties which will remain encumbered with a PACE obligation are not eligible for FHA mortgage insurance." If you refinance into an FHA loan, the PACE assessment is paid off as part of the transaction.

FHA makes room for that in the loan amount. FHA's refinance section, II.A.8.d, revised 05/25/2025, lists what counts as existing debt when the maximum loan is calculated. For a rate-and-term refinance, the list includes "the unpaid principal balance of any unpaid PACE obligation." For a Simple Refinance, which replaces one FHA loan with another, it includes "the unpaid principal balance of any PACE obligation."

The new loan is still limited to the lowest of the caps FHA sets, including its loan-to-value ceiling, so the appraisal matters. How a home appraisal works explains where that value comes from. How FHA loans work covers the rest of the program.

The three guides side by side

	Freddie Mac	Fannie Mae	FHA
Rate-and-term refinance pays off the PACE	Yes; with first-lien priority, only if your current loan belongs to Freddie Mac (4301.4, 4301.8)	Yes, as an exception for energy-related debt, with invoices or receipts (B2-1.3-02)	Yes, the balance counts as existing debt (II.A.8.d)
Cash-out refinance	Paid in full from the loan if it has first-lien priority (4301.8)	Ineligible as cash-out in certain transactions if you have the equity and choose not to pay it off (B2-1.3-03)	The cash-out rules do not mention PACE; the assessment has to be paid off (II.A.1.b)
Can the PACE stay on the home?	Not if it has first-lien priority	Yes, if it ranks behind the mortgage or is not secured by the home, and meets B5-3.4-01 (B2-1.2-04)	No (II.A.1.b)

A VA loan follows VA's own guide, which this article does not cover. If you are a veteran planning energy work rather than paying off an assessment, the VA energy efficient mortgage builds that cost into the loan. Every lender also applies its own reading of these rules, and your file is decided on its own facts.

Getting your file ready for a PACE payoff

1. You will want to find the assessment on your tax bill. It helps to note the program name and the amount, so the lender can match it to the payoff figure.
2. It helps to ask for a payoff figure early. The program that administers your assessment can give you one, and the new loan is built from that number.
3. Please provide your complete PACE agreement, every page, and the invoices or receipts for the work. Fannie Mae's route depends on showing the money went to energy improvements, so it helps to have it all ready.
4. It is worth finding out who owns your current mortgage. The company you send your payment to can tell you. When the assessment has first-lien priority, that answer decides whether Freddie Mac's no-cash-out route is open.
5. You will want to look at the new payment. Once the assessment is paid off, its balance becomes part of your mortgage, so it helps to compare the old and new payments side by side.

If the assessment shows up in the title work for your refinance, how a title item gets cleared before closing explains how that gets handled.

Mistakes that slow a PACE refinance down

Treating the assessment as part of your taxes. It arrives on the tax bill, and to the lender it is still a debt with its own balance, which the loan amount has to account for from the start.

Losing track of the invoices. If the work was done years ago, the receipts may be in a drawer or an old email. Under Fannie Mae's rule they are the documentation, and finding them early saves a second request.

Assuming the no-cash-out route is open. When the assessment has first-lien priority, Freddie Mac's no-cash-out payoff only works if your current loan belongs to Freddie Mac. That is easy to check before you apply.

Planning cash out and leaving the assessment in place. Under Fannie Mae's cash-out rule, that plan can make the loan ineligible as a cash-out refinance when you have the equity to pay the assessment off.

An illustration with made-up numbers

Numbers below are made up to show the mechanism. They are not a real file and not a quote.

You financed a solar system through a PACE program four years ago, and it is collected on your tax bill. Your home appraises at $450,000. You owe $260,000 on your first mortgage, the PACE payoff figure is $28,000, and you want a rate-and-term refinance.

Rate-and-term refinance, home appraised at $450,000

Payoff of the current first mortgage       $260,000
Payoff of the PACE assessment             (+) 28,000
Closing costs on the new loan              (+) 7,000
                                         -----------
New loan amount                            $295,000
Cash to you                                      $0

The new loan is about 66 percent of the appraised value. After closing, you have one mortgage payment and no PACE line. Under Fannie Mae, the lender would ask for the invoices or receipts from the solar installation. Under Freddie Mac, if the assessment has first-lien priority, this route works only if Freddie Mac owns your current loan. Under FHA, the $28,000 counts as existing debt in the loan calculation. How closing costs are built explains the $7,000 line.

Common questions

Do I have to pay off a PACE loan to refinance?

It depends on the guide your new loan follows. FHA will not insure a home that still carries a PACE assessment, so an FHA refinance pays it off. Freddie Mac requires it paid in full when it has first-lien priority. Fannie Mae can let an assessment stay when it ranks behind the mortgage or is not secured by the home at all, as long as it meets its section B5-3.4-01.

Can a rate-and-term refinance pay off a PACE assessment?

Yes, under all three guides. Fannie Mae's limited cash-out refinance can pay off a PACE loan used solely for energy-related improvements, with invoices or receipts as proof. Freddie Mac's no-cash-out refinance can pay it off, and when the assessment has first-lien priority, your current loan has to belong to Freddie Mac. FHA counts the PACE balance as existing debt in a rate-and-term refinance.

Can I do an FHA refinance with a PACE assessment on my home?

Yes, as long as the assessment is paid off in the refinance. FHA's Handbook 4000.1 says a home that will still carry a PACE obligation is not eligible for FHA mortgage insurance. Its refinance section counts the unpaid PACE balance as existing debt, so the payoff can be part of the new loan, within FHA's loan-amount limits.

Can I take cash out and keep the PACE assessment?

Under Freddie Mac, no, if the assessment has first-lien priority, because a cash-out refinance has to pay it in full. Under Fannie Mae, certain transactions are ineligible as a cash-out refinance when you have enough equity to pay off the PACE loan and choose not to. Fannie Mae's section B5-3.4-01 decides which transactions that covers.

What documents does a lender need to pay off a PACE assessment?

The lender will want a payoff figure from the program that administers the assessment. Fannie Mae asks for invoices or receipts showing the money went to energy improvements, and an energy report in many cases. Freddie Mac asks for evidence that the debt is a PACE obligation with first-lien priority, and your PACE agreement can help show that.

If I sell instead, does a PACE assessment have to be paid off?

The assessment generally stays with the home when it sells, and the next owner takes over the payments, according to FHA's handbook. If the person buying your home is using an FHA loan, the assessment has to be paid off for FHA to insure the loan. FHA's asset sections, II.A.4.d and II.A.5.c, revised 08/19/2024, say that when you pay it off as the seller, FHA does not count that payoff toward its limit on what a seller can contribute to the buyer's costs.

Your next step

You can see rates priced for your refinance on the homepage without a credit pull or an account. Choose the option that works best for you, and the application opens from there. The option you choose can change as your file comes together, including once the PACE payoff figure is in hand. You are also welcome to call me first. Once I see your current loan and the assessment, I'll tell you which guide fits.

Nothing here is a loan approval, a denial, a commitment to lend, or legal advice. The program that administers your assessment sets the payoff, and the lender decides the loan.