Should You Get an Energy-Efficient Mortgage?

If you want to make your home weather-tight and super efficient but don’t know where to find the money for the improvements, a “green” mortgage may be the thing for you.

These mortgages let you add extra money to the balance of a mortgage loan or refinance for making energy-saving improvements. Or you can use the extra money to pay the higher cost of an energy-efficient new home. Green mortgages are sponsored by or backed by federal government agencies.

Well-kept secret

EEMs have been around since Jimmy Carter was president. All lenders are eligible to offer them, Steve Baden, executive director of RESNET, said in an interview. But few of these loans are made and you don’t hear much about them. Baden guesses just “a couple thousand” green mortgages are written each year.

The problem is, “no one tracks who actually does offer them,” he says. Some mortgage brokers or individual lenders’ sales agents are familiar with helping borrowers obtain green mortgages, but, according to Baden, it’s up to homeowners to find a lender who’ll work with them. We’ll tell you how to apply in just a minute.

Energy improvements that pay

There are two types of green mortgages:

• EEMs (energy-efficient mortgages), used to buy new homes which, like Energy Star-certified homes, meet energy-efficiency standards.
• EIMs (energy-improvement mortgages), used to give existing homes energy-efficiency upgrades.

Just to make things confusing, EEM is often used as shorthand to describe both types of green mortgages.

Says U.S. News & World Report:

An energy-efficient mortgage allows you to finance the cost of improvements that will curb energy usage and maximize efficiency. You can finance solar panels, geothermal heating, tankless water heaters and newer heating, ventilation and air-conditioning systems.

Eligible improvements also can include weatherization and added insulation, energy-efficient windows, new ducts or repairs, and energy-efficient appliances.

As the price of heating and cooling a home rises, these financing tools will make even more financial sense to budget-conscious homeowners and homebuyers.

How it works

• You borrow a slightly larger mortgage to cover the cost of improvements. U.S. News explains:
  

  Funding for energy improvements is usually capped at 10 percent of the appraised value of the completed property. Conventional lenders also may be able to boost your buying power by counting your energy savings as income.

• The mortgage size is expanded by giving borrowers a slightly higher debt-to-income ratio or credits on loan fees; the down payment is not increased nor is a second mortgage or line of credit required.
• Green mortgages cost more, not because fees or interest rates are higher but because the loan is several thousand dollars larger, making monthly payments higher.
• You can’t get an EIM unless a certified energy rater (auditor) determines you’ll earn back at least the extra costs through increased savings on utility bills.
• You’re given a timeline for completing the improvements.

Increased borrowing power

The amount of extra borrowing power you’re allowed depends on two things:

• Potential savings from your planned improvements.
• Lending limits imposed by the mortgage type you use.

EEMs are available through Fannie Mae, Freddie Mac and with federally insured FHA or VA home loans. (You must be a qualified military member, reservist or veteran to get a VA loan.) Each program has its own rules and caps on how much additional can be borrowed.

Increased selling power

One of the benefits of a green mortgage is that energy-efficient homes can sell for a higher price. How much higher? It depends on the home, the improvements and demand in the local market.

RESNET (Residential Energy Services Network), a nonprofit membership group that trains home energy auditors and raters and sets home energy standards, says:

Another study published in the Appraisal Journal documented that the market value of a home increases $20 for every $1 decrease in the annual energy costs. According to a recent analysis by the Pacific Northwest National Laboratory, building a home to exceed the Model Energy Code would result in an annual savings of $170 to $425. Applying these findings to the analysis published in the Appraisal Journal would equate to an increased home market value of between $4,250 to $10,625.

3 steps to apply

To get a green mortgage, Baden suggests:

1. Learn if you qualify for a mortgage. (Read “9 Golden Rules of Mortgage Shopping“).

2. Hire a rater. Have the home’s efficiency evaluated by a certified rater (Search RESNET for professionals near you. Ask the rater to tell you which improvements will pay back best. Also ask the rater for referrals to qualified contractors and lenders familiar with EEMs.

Here’s how energy rating works. About.com says:

An energy rater will prepare a HERS (home energy rating system) report. The cost of this report could vary between $250 and $800. Sometimes the cost of the HERS report can be rolled into the loan. The HERS report will:

• Recommend types of upgrades.

• Estimate energy savings.

• Estimate life of upgrades.

3. Find a bank, broker or other lender. Shop for a lender willing to help you obtain a green mortgage. The lender must be willing to complete extra paperwork and set up an escrow account from which loan proceeds are disbursed as the home improvements are completed, according to Baden.

Here are links to rules, requirements and other information from RESNET, HUD and Fannie Mae:

• FHA Energy Mortgage Program.
• Veterans Administration Energy Mortgage Program.
• Freddie Mac’s Support for Energy Conservation.
• Fannie Mae Energy Improvement Feature.
• HUD’s Energy Efficient Mortgage Homeowner’s Guide.
• RESNET’s links to additional forms and guidelines.

If you have experience using a green mortgage, we’d love to hear about it. Post a comment below or at Money Talks News’ Facebook page.