One of the best tools for making your dream home more affordable while saving on the cost of power, heating and cooling is the energy-efficient, or “green,” mortgage.
Most energy-efficient mortgage, or EEM, programs let you qualify for bigger loans than you would otherwise by folding in the additional cost of making improvements for energy efficiency or of purchasing an already energy-efficient home. Another version of the green mortgage provides discounts on loan fees or interest rates for homes that are certified as energy-efficient.
Because mortgage interest payments are tax-deductible, an energy-efficient mortgage can be a more cost-effective way to finance home-energy improvements than using a credit card, bank loan or cash, which usually offer no tax benefits.
The Federal Housing Administration, Fannie Mae and the U.S. Department of Veteran Affairs each have some version of a green mortgage. Freddie Mac, while having no formal energy-efficient mortgage program, allows lenders to take the projected utility savings from home upgrades into account when setting the loan amount.
In February 2009, the Energy Programs Consortium, a nonprofit policy research group in Washington, D.C., launched its new Energy Star Mortgage in Maine as a joint effort with the state housing agency there.
The consortium was formed 10 years ago by a handful of state and federal energy and regulatory agencies to coordinate energy policy and programs. Last month, it adopted the “Energy Star” label, which refers to a system adopted by the U.S. Environmental Protection Agency and Department of Energy for applying an energy-efficiency rating to appliances, equipment and new homes.
The consortium’s Energy Star Mortgage program targets families who are buying new homes or refinancing existing ones to encourage them to make the structures more energy efficient and, therefore, more affordable, says Mark Wolfe, the group’s executive director.
It is designed to help homeowners save a minimum of 20 percent on energy costs. And like most other green mortgage programs, the Energy Star Mortgage incorporates the cost of energy-saving improvements into the loan. This type of mortgage also takes into account any existing state weatherization or energy efficiency benefit, consortium director Wolfe says.
As for participating banks, they must either offer a mortgage discount or pay part of the closing costs to have the right to offer a mortgage under branded label of Energy Star Mortgages.
“For the lender, it’s a marketing opportunity because more homeowners are interested in these kinds of mortgages,” Wolfe says. “It’s a marketing incentive. It’s like a free toaster.”
Several states, including Kansas, New York and Pennsylvania, already fund their own green-mortgage programs, and a few private lenders, such as Citibank and Bank of America, offer their own energy-efficient conventional mortgages apart from those that are federally insured.
The FHA program allows homeowners to finance energy efficiency improvements by adding up to 5 percent of the property value up to $4,000 to the green mortgage. The limit may increase if the loan is used for weatherization improvements or to pay for solar photovoltaic panels or solar water heating installation.
Fannie Mae will allow homebuyers to bump their debt-to-income ratio — one factor in determining a mortgage’s size — by 2 percent, as the larger mortgage payment would be balanced by the monthly utility savings from green improvements.
In the case of a new, already energy-efficient home, homebuyers can increase the mortgage amount by an additional 5 percent of the home’s value.
Through the VA’s energy-efficient mortgage program, qualified military personnel, reservists and veterans are allowed to finance up to $3,000 in upgrades based solely on their documented costs and up to $6,000 if the improvements are projected to produce more savings than the cost of those upgrades.
Before you can take advantage of an energy-efficient mortgage’s savings benefits, you’ll have to find one, which may be no easy task. Many lenders are reluctant to offer the products, while those that do have been slow to market them.
In an April 2007 report, the energy consortium pointed to several barriers to green mortgages: They require more paperwork and processing time; they’re harder to sell in the secondary mortgage market; borrowers rarely request them, and real-estate agents are largely unfamiliar with them.
“For some lenders, it’s similar to doing a rehab mortgage because they have to hold the money in escrow until it’s done. So there are extra steps involved,” Wolfe says.
Jeff Bricmont, certified green building professional with Modern Earth Inc., a mortgage broker and FHA green-mortgage processor in Encino, Calif., says even when some lenders make information about green mortgages available to customers, they don’t necessarily push the products.
“Per FHA guidelines, every FHA loan packet has an EEM Fact Sheet as a disclosure, though you wouldn’t know it from the volume done,” Bricmont says. “Most loan officers aren’t familiar with the benefits or steps to take for an EEM. If they understood the benefit to the client they might be more supportive.”
If you’re trying to find out just who is offering green mortgages in your area, Wolfe suggests checking the Web site of your state’s housing finance agency for information or contacting your state energy office. You can locate that number on the Web site for National Association of State Energy Officials.
There are two ways a home can qualify for a green mortgage. For existing homes, you’ll need energy-saving improvements verified by a Home Energy Rating System, or HERS, report, following an inspection by a certified home energy rater. To find one in your area, go to the Web site of the Residential Energy Services Network, click on “Home Energy Ratings,” and then select “Find a Certified Rater.” For new construction, a builder must certify that home meets energy-efficiency guidelines.
The HERS inspection takes into account the home’s the insulation, appliances and windows, as well as the local climate and area utility rates. The resulting report includes the overall rating score — from 1 to a top score of 100 — for the house in its current condition.
It also gives recommended upgrades, estimates of the cost, the annual savings, the useful life of the upgrades and your rating score after the recommended improvements are installed. To qualify for a green mortgage, the HERS report must indicate that completing the process will save money on your utility bill.
The cost of a HERS inspection and rating usually runs from $100 to $300, according to the Federal Citizen Information Center in Pueblo , Colo. In some cases, the seller, lender or real estate agent may pay this cost, or it may be financed as part of your mortgage.
Doris Ikle, owner of CMC Energy Services in Bethesda, Md., says her energy auditors can complete an inspection and deliver a report in one day.
“The energy inspectors take pictures inside the house and describe each of their recommendations very specifically,” says Ikle. “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.”
Will Mounts purchased his West Hills, Calif., home in January 2009 with an FHA-backed, energy-efficient mortgage processed by the Modern Earth brokerage, which handled the arrangements for the HERS inspection and got bids from contractors.
The inspector’s report included a recommendation of the three most cost-effective changes he could make to the house: installing attic insulation, sealing the air ducts and installing dual-paned windows.
Modern Earth solicited bids from contractors. Making the upgrades cost Mounts $10,895, including the cost of the HERS inspection and the management fee from Modern Earth. It also added $46 per month to Mount’s house note. Based on his HERS report, he expects to save about $1,000 per year on energy costs.
Because of the cost-efficiency requirement, Mount says the contractors had incentive to bring their prices down. He says that when he tried pricing the job on his own, he got quotes of around $10,000 for the new windows alone. By getting the home improvements done through a green-mortgage program, he was able to get the windows for around $5,000.
Although the energy consortium’s Wolfe laments the current low level of lenders offering green mortgages, he has noticed more banks talking about them. “I think that’s kind of encouraging.”