Home > Mortgages > Should You Get an Energy-Efficient Mortgage?

Comments 0 Comments

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, (Residential Energy Services Network), 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% 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, 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. Find out if you qualify for a mortgage.

2. Hire a rater. Have the home’s efficiency evaluated by a certified rater. 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.

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.

This post originally appeared on Money Talks News.

More from Money Talks News:

Image: moodboard

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team