Sustainable living is not only beneficial for saving the planet, but also for saving a lot of green--in the form of cash. Instead of living in a home with outdated appliances that not only reek havoc on the environment but also the electric bill, consumers are making green upgrades using an energy efficient mortgage.
An energy efficient mortgage (EEM) allows the borrower to finance certified eco-friendly products and upgrades as part of a single mortgage loan. The mortgage can be used for making home renovations, refinancing or a new purchase. Items typically covered include dual pane windows, new HVAC units, insulation, energy efficient heating and cooling systems, solar technologies and energy efficient appliances and upgrades.
The idea behind an EEM is that energy efficient homes cost less to operate. The borrower who opts for an energy efficient home can afford to spend more on their mortgage loan because costs are reduced in the long run.
An EEM provides several benefits to the borrower:
- Borrowers may qualify for a larger loan if paying for energy efficient upgrades and renovations is wrapped into the mortgage
- Upgrade to energy efficient windows produce a 25% annual heating and cooling savings
- A programmable thermostat can save 2% on heating and 3% on cooling bills a year
- An Energy Star dishwasher can save up to 1,200 gallons of water per year
- Many mortgage brokers provide discounts if the borrower opts for certified energy-efficient upgrades
- Instead of purchasing energy efficient products with cash or a credit card, borrowers can take advantage of the mortgage interest tax benefits
- Consumers see an immediate energy bill cost savings by installing eco-friendly products--typically a minimum of 20% savings
How Energy Efficiency is Evaluated
Obtaining an EEM isn’t simply telling your lender you’d like to buy energy efficient products. Borrowers must complete a Home Energy Rating System (HERS) report, conducted by an outside energy consultant. The consultant evaluates several areas of the home including insulation, appliance efficiency, window types, local climate and utility rates to arrive at a score.
The HERS consultant creates a report that is provided to the lender that includes an overall rating, recommended energy upgrades, future score once the improvements are made and estimated annual total energy expense post upgrades.
According to Doris Ikle, owner of CMC energy Services, the process is quick and painless for the homeowner. "The energy inspectors take pictures inside the house and describe each of their recommendations very specifically. The numbers we give are based on the estimated costs from the R.S. Means book, which is sort of like the (Kelley) Blue Book for repairs.”
Scores range from 1 to 100 with the higher scores garnering the higher energy rating. Although a HERS report can cost between $300 to $800, the cost can be wrapped into the mortgage loan, depending upon the EEM program and lender.
Currently three types of Energy Efficient Mortgages are available, with the FHA and VA programs being the most accessible. Your mortgage broker will help you determine which EEM program is best for you:
Through the FHA EEM program, mortgage brokers can add up to 100% of energy efficient improvements to an existing mortgage loan. The agency insures the mortgage loan up to 5% of the home’s appraised value or $4,000, but not to exceed $8,000. Features include:
- The actual mortgage loan cannot be greater than the projected savings of the energy improvements
- FHA EEMs can be wrapped with FHA 203( h) loans, especially those who are living within presidentially declared disaster zones
- Typical FHA loan limits to do not apply to FHA EEMs
- Up to $200 of the HERS inspection cost can be included in the mortgage loan
- FHA EEM is offered to anyone who meets the income requirements of FHA’s Section 203 (b)
- New and existing owner-occupied homes (up to two units) qualify
Like FHA EEMs, VA EEMs can be used alongside VA mortgage loans for either a purchase or refinance. This loan is available to qualified military personnel, reservists and veterans. Features include:
- Homebuyers can borrower up to $3,000 if the borrower only furnishes documentation of improvement costs or a contractor bid
- Up to $6,000 can be borrowed for if the projected energy savings is grater than the increase in mortgage payments
- Applicants cannot include the costs of their own labor in the total amount
Mortgage brokers who sell the loans to Fannie Mae or Freddie Mac offer conventional EEM. Buyers can increase their purchase power because the lender can increase the borrower’s income to equal the estimated energy savings. Those who seek funding through private lenders reap these benefits:
- Home buyers can borrow up to 15% of an existing home’s appraised value based on a HER
- Fannie Mae EEMs only apply to single-family, owner-occupied homes
- Freddie Mac provides mortgages to borrowers living within one to four unit homes and increases the borrower’s income level according to the amount of realized savings from energy improvements
Energy Efficiency Mortgage Tips
Like any new process, knowing the “in’s” and “out’s” of obtaining an energy efficient mortgage will help with the process:
- Get your HERS rating done as soon as possible - this will help the process move along smoothly
- Remember that not all Energy Efficiency Mortgages produce the same savings results. Benefits your neighbor receives may not be the same as yours - it depends on your improvements and the home
- Shop mortgage lenders and compare and contrast programs. Your lender is the best source of information so ask for advice during the early stages and do comparisons
- When seeking an FHA EEM, contact an FHA approved lender by completing our mortgage application.