Here’s encouragement if you’re thinking of making energy-efficiency upgrades to a home you own or are buying. Mortgage investor Fannie Mae’s new HomeStyle Energy mortgage loan lets borrowers qualify for a bigger loan than they otherwise would so they can cover the cost of certain energy-saving improvements.
If you are buying a home or refinancing one you can add enough to your mortgage to cover the cost of energy-efficient replacement windows or solar panels, for instance, folding the financing into your home loan. Other eligible projects include adding insulation, installing water-efficient toilets or showers, replacing an older HVAC system or hot water heater, and air-sealing and caulking.
Get a bigger loan
“In recognition of the value being added to the property by cutting utility bills for the long term, participating lenders will let you borrow more than on a standard mortgage,” writes real estate columnist Kenneth R. Harney, in The Washington Post.
… the upgrades that can cut utility bills by the greatest amount are also the priciest. Solar water heating systems can cost between $1,500 to $3,500 and solar panels can cost $15,000, but when used together, they can drop electricity bills to practically nil.
Lenders typically tie the size of a home loan tightly to market values in the surrounding neighborhood. This program lets the loan size grow to include qualified projects. Because interest rates are lower on a first mortgage than on a home-equity loan, line of credit, second mortgage or other loan, financing them this way lowers the cost of borrowing for the projects.
A streamlined version for basics
For bigger loans, borrowers will need an energy report to demonstrate that the improvements will be cost-effective. However, a streamlined version of the HomeStyle Energy mortgage is available for certain basic projects costing $3,500 or less. The HomeStyle Energy mortgage FAQ explains: “An energy report is not required for basic weatherization and water-efficiency improvements up to $3,500 because studies have shown that they are cost-effective energy improvements.”
Basic weatherization jobs that are eligible for the $3,500 streamlined approach include:
- Air sealing: Sealing ducts, weather-stripping doors and caulking windows and plumbing.
- Insulation: Beefing up insulation in attic, floors, walls and basements.
- Windows and doors: Efficient and weather-tight windows and doors qualify for purchase and financing under the $3,500 no-assessment limit.
- Controls: Smart thermostats and other controls are eligible.
More-ambitious projects can qualify for more funds — up to 15 percent of what the home’s appraised value is estimated to be after the work is complete. These projects require an energy report to show that the improvements, at least when considered all together, are worth the investment. “Not every energy improvement is required to meet the test for cost-effectiveness, provided that all of the proposed improvements together meet the test for cost-effectiveness,” according to the FAQ.
Also, HomeStyle Energy loans can be used to pay off higher-interest debt you’ve used to make energy improvements. Writes Harney:
HomeStyle Energy loans can also be used to pay off existing energy-related debts, such as credit card balances, home equity credit lines and PACE (Property Assessed Clean Energy) liens, which are popular in some parts of the country and are tied to local property tax assessments.
Homes with one to four units qualify, but manufactured homes are not eligible to participate.
Pay to save
When it comes to energy efficiency, it costs money to save money, but buyers get that.
A study out of the Lawrence Berkeley National Laboratory, “Selling Into the Sun: Price Premium Analysis of a Multi-State Dataset of Solar Homes,” found that buyers paid up to $15,000 more for a home with an “average-sized” photo-voltaic solar panel system. The research was funded by the U.S. Department of Energy and examined home sales in eight states from 2011 to 2013.
Home buyers are demanding energy efficiency and certain green products. RealtorMag says buyers particularly prize:
- High-efficiency insulation
- High-efficiency windows
- Double- and triple-glazed windows
- Tankless water heaters
- Water-conserving devices
- Products aimed at improving indoor air quality
- Renewable flooring products, such as bamboo and cork
Investments in improvements that save on utility bills resonate with home buyers, and they are willing to pay for these upgrades. According to survey research by the National Association of Home Builders:
[H]ome buyers are willing to pay more for a home if they can get lower utility costs in return. On average, they will pay an additional $10,732 up front to save $1,000 a year in utilities.
Other energy-efficient mortgages
The Fannie Mae program has the backing of the federal government. HomeStyle Energy is just the most recent energy-efficient mortgage (EEM) product to be offered. The Federal Housing Administration and Department of Veterans Affairs also have them, as does Freddie Mac, another big mortgage investment company. ResNet, the Residential Energy Services Network, has details about these products. The government supports them by insuring the loans against losses to investors.
Harney, the Washington Post writer, urges borrowers also to consider the energy-efficient mortgages offered by Freddie Mac. Those, he says:
… have some key advantages over Fannie’s program: There is no cap on the percentage of as-completed appraised value that can go for energy improvements. There is no mandatory residential home energy report. And Freddie’s maximum debt-to-income limit for borrowers is 45 percent, vs. Fannie’s 38 percent.
You should not have to become an expert on energy-efficient borrowing if you want one of these loans. That’s a lender’s job. Or a mortgage broker’s.
Our advice: Interview a number of these mortgage specialists and keep going until you find one who knows these programs inside out and can steer you through the requirements and find the best deal for you.
What energy-efficient projects have you undertaken in your home? How have you paid for them? Share with us in comments below or on our Facebook page.
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