Prepaid Interest | Renew Financial

What is Prepaid Interest on PACE Financing?

Prepaid interest is also known as capitalized interest.

Discover what prepaid interest is on PACE financing. Watch our short 4-minute video that explains prepaid interest and how it works with the tax roll cut-off.

PACE financing is paid back annually on your property tax bill. Prepaid interest accrues after your contractor is paid for your home improvement project (when your project, “funds”) until the date your initial annual payment is due on your property tax bill.

Due to the structure of PACE financing, there is a gap between when PACE financing funds and when the initial annual payment is due on your property tax bill. The prepaid interest is spread evenly (amortized) into the total amount financed, so the initial annual payment pays for the following year and a portion of the prepaid interest.

Take a mortgage as an example. If you close in the middle of the month, you might have a month or two before your first payment is due. When you make your first payment, you are paying in advance for the following period. Since no interest is collected between your closing date and your first payment due date, this interest is typically rolled into your closing costs or total loan amount. It is the same concept with PACE financing. The difference is that PACE may have a long gap of time in which interest accrues due to the annual property tax schedules.

Tax Roll Cut-off

Each county defines a date for which property taxes are calculated for the prior year. To determine which tax year your initial annual payment will appear, we have a "tax roll cut-off" date for each county. This date determines which property tax year your initial annual payment will appear on and how much prepaid interest will accrue.

There are two potential scenarios related to the tax roll cut-off dates in your county and your PACE application.

1) The estimated window for when your project will fund does not span the tax roll cut-off date in your county. This is usually if your project funds in the autumn or winter.

2) The second is when the estimated window for when your project will fund does span the tax roll cut-off in your county. This is usually if your project funds in the spring and early summer.

First Scenario

In the first scenario, when your funding date does not span the tax roll cut-off, the total prepaid interest decreases as the gap between the funding date and the initial annual payment due date decreases. So the sooner your project funds in this scenario the more prepaid interest will accrue.

Second Scenario

In the second scenario, If your funding date is before the tax roll cut-off, your first annual payment will be on the current year's property tax bill. If your funding date is after the tax roll cut-off, your first annual payment will be a year later (next year's tax bill).

Dependency on Funding Date

If your project funds before the tax roll cut-off, you will accrue less prepaid interest because your initial annual payment is on this year's tax bill. If your project funds after the tax roll cut-off, you will accrue more prepaid interest but your initial annual payment will be further out on the next year's tax bill.

Please note: The prepaid interest on your financing estimate represents the maximum amount of prepaid interest that may be included in your financing. The actual amount of prepaid interest included in your financing may be lower depending on when your project is completed.

Prepaid interest does not accrue during the time your contractor is installing your home improvement or before it is completed; it begins to accrue after the project is funded.

A project funds once:
• The contractor finishes the project and submits all final documentation to Renew Financial;
• You approve of the project by signing the Completion Certificate;
• Renew Financial approves the final documentation, and Renew Financial pays your contractor for the project.

Download a PDF about prepaid interest