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Energy efficient mortgages can be heart(h) warming

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"It seems there's a higher percentage than of average people who are thinking about it," he says. "Americans don't change until they feel pain, and this is going to be a painful winter on heating bills."

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Imelda Ramirez says she's grateful that her family made their energy improvements with the EEM, given the grim outlook.

"Just looking at the numbers, if it does go up 40 percent, that's something we can support. I'm just not worried about it," she says.

To encourage customers to check out the EEM, Wiese says his office is considering offering a challenge to customers: He'll pay closing costs if they don't save money.

"We feel pretty confident we can do it in every case," he says.

EEMs are available as fixed-rate and adjustable-rate mortgages. Buyers can also refinance their current loan with an energy efficient mortgage. While interest rates generally remain low, buyers should run the numbers to insure that the energy savings will offset the costs associated with the new loan. EEMs typically provide the most savings on older homes.

The fine print
Saving money is in fact a requirement of an EEM. Borrowers can spend up to 15 percent of the value of the home on energy improvements. They must deliver greater energy savings than the upfront cost.

EEMs are particularly attractive to buyers looking for lower-priced properties, either as buyers or investors. Lower prices usually mean older homes that are typically less well-insulated and are more likely to have leaky windows and doors and inefficient appliances. By fixing those flaws with EEM financing and realizing lower monthly operating costs, a buyer can afford a bigger house.

Also, the cost of the improvements is added to the appraised value, rather than taken out of equity, giving the buyer an immediate stake in the property.

The key with both an EEM and the new tax credits is making improvements that will save on energy costs. Those usually aren't visible or otherwise considered an enhancement to the home -- things like tightening the house with weatherstripping and caulk, adding more insulation, and installing newer furnaces and air conditioners.

New windows are one of the improvements that can make both an aesthetic and functional difference. But the tax credit for them is capped at $200. Other qualifying improvements, including new furnaces, air conditioners and water heaters, are capped at $300.

"I think everybody should get their $500," says Ed Pollock, team leader in residential building research at the Department of Energy. But since homeowners still are on the hook for 90 percent of the improvement cost, "People need to be intelligent about what they do," he says.

Baden says he expects that the tax credits will spur homeowners to use rater services, in order to decide what improvements are worthwhile.

"The smart homeowner would. It's their money. They're putting up 90 percent of the cost, and I think it would be well worth it for a smart homeowner to see what the best improvement is" he says. "Not all improvements are equal in terms of cost effectiveness."

Tax credits are also available to new home builders, but the bar is higher. A credit of up to $2,000 is available if the home's heating and cooling load is reduced 50 percent, which must be verified by a third party like an energy rater. That's an aggressive threshold, Pollock says. "The builders I have talked to are not too excited about it."

Cari Noga is a freelance writer based in Michigan.

Bankrate.com's corrections policy -- Posted: Dec. 15, 2005
 
 
More stories by Cari Noga
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