What is an Energy-Efficient mortgage?

EEMs are energy-efficient mortgages that allow homeowners to buy homes with energy-saving improvements or to renovate their homes to be more efficient. EEMs can be used to refinance or purchase a home. Although they aren’t a popular type of mortgage, shoppers still have other options, such as conventional or government-backed loans.

How to determine if an energy-efficient loan is right for your needs.

How to make an energy-efficient mortgage

An EEM can be used to:

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  Refinance or buy a home that has energy-efficient features, such as an Energy Star-certified house.
  

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  Purchase a house and then renovate it using energy-saving improvements.
  

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  Financing to finance energy-efficient upgrades to your home.
  

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  Repay debts related to energy-efficient home improvement, such as a Property Assisted Clean Energy (or PACE) loan.
  

A qualified home energy assessor or rater must be able to recommend energy-efficient upgrades for renovations. Your mortgage lender will then need to review the recommendations. The total cost of the project must not exceed a certain dollar amount. This varies depending on loan type.

Energy-efficient mortgage requirements

An EEM requires additional requirements. A home energy assessment is required in order to be eligible for an EEM. Home Energy Rating System (or HERS) is used to rate newly constructed homes. The U.S. Department of Energy Home Energy Score is used to rate older homes.

If your renovation costs are less than a certain dollar amount, lenders may waive the requirement for an energy assessment.

A certified professional energy rater will conduct a room-by–room assessment of your home. They also examine past utility bills. They consider the following factors to determine the current home’s energy efficiency:

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  Drafts and air leakage.
  

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  Level insulation.
  

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  Heating, ventilation, and cooling efficiency.
  

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  Efficiency of lighting, thermostats and appliances.
  

The home is given an energy rating ranging from 0 to 150 after the assessment. A lower score means that the home is more energy efficient. An EEM may be granted to a home that is already energy efficient. The inspector will suggest which energy-saving measures, such as solar panels or new windows, would result in the greatest annual savings relative to their cost of installation.

The energy assessment and the proposed upgrades are reviewed by the mortgage lender. They then approve a list cost-effective projects. You can finance the upgrades with your mortgage, or cash out refinance.

How can an energy-efficient mortgage help me save money?

Yes. Yes. Energy-efficient mortgages have higher rates than fixed-rate mortgages, and homes that are energy efficient have lower utility bills.

You’ll probably have a higher monthly payment if you make renovations and they are rolled into your mortgage. You can still save money if you consider lower utility bills.

Different types of energy-efficient mortgages

EEMs can be used as home purchase loans and refinance loans. Refinances can be used to pay off home energy efficiency debts, such as PACE loans, or to tap into your home equity for energy-efficient home improvement projects.

There are two options: conventional mortgages or government-backed loans that are insured by the Federal Housing Administration (U.S. Department of Veterans Affairs).

There are two options:

• Mortgage by GreenCHOICE, Guaranteed by Freddie Mac

• HomeStyle Energy mortgage , guaranteed by Fannie Mae

Both have refinance and purchase options.

GreenCHOICE and HomeStyle Energy mortgages offer similar benefits, but they differ slightly. GreenCHOICE loans don’t require an energy report if your upgrade costs are less than $6,000. The cutoff for HomeStyle Energy mortgages is $3,500.

These conventional loans allow borrowers to finance energy efficient upgrades up to 15% of the home’s “as full” appraised value. This is the property’s value after all the improvements have been made. Example: A home with a “as complete value” of $350,000 could be eligible for $52,500 in energy-efficient improvements.

This loan is available to eligible spouses, veterans and service personnel.

These loans are different from conventional loans because of their eligibility. A VA EEM must be used in conjunction with a VA home purchase loan, or interest rate reduction refinance mortgage loan. This is not a separate home loan product. Your EEM must be closed at the same moment as your refinance or purchase loan.

Borrowers have the option to use a VA EEM for up to $6,000 to finance energy-efficient improvements.

An EEM supported by the Federal Housing Administration can be used to buy or refinance new construction or condos.

• Existing energy-efficient homes: The FHA allows lenders to increase your qualifying ratios by 2 percentage points to take into account the energy savings. This will allow borrowers to be eligible for higher loan amounts.

• The FHA permits borrowers to finance energy improvements that are cost-effective and meet certain parameters. Cost-effective means that the upgrade costs are equal or less than the energy savings.

Which projects can be funded by an energy-efficient mortgage?

Each mortgage type has its own guidelines regarding the types of upgrades that are allowed. The most popular projects are listed on all three lists. If you are unsure about what is allowed, ask your mortgage lender.

Improvements that are energy-efficient and can be funded through an EEM include:

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  Heating and ventilation systems.
  

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  Smart thermostats.
  

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  Energy-efficient windows, doors and windows.
  

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  Weather-stripping and caulking.
  

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  Low-flow water fixtures, e.g. toilets, showers.
  

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  Weatherization and insulation of homes.
  

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  Energy-saving appliances such as refrigerators water heaters washers and dryers.
  

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  High-efficiency light bulbs.
  

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  Renewable energy such as solar, wind, or geothermal.
  

Fannie Mae’s HomeStyle Energy Mortgage allows homeowners to finance the cost for natural disaster preparedness through an EEM. This could include:

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  Retrofitting foundations to protect against floods, earthquakes or high winds
  

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  Storm surge barriers or retaining walls.
  

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  Radon remediation.
  

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  Removal of bushes and trees in wildfire-prone regions.
  

The pros and cons of energy-efficient mortgages

Although energy-efficient mortgages offer many benefits, they are not suitable for every homeowner. These are some points to be aware of.

• You can borrow more: If you meet all the requirements, you may be eligible for a larger loan in order to purchase an energy-efficient house. An EEM loan can offer lower interest rates than other types of financing due to the energy-efficiency cost savings.

• Lower utility bills: Savings from lower monthly energy bills can often outweigh higher mortgage payments.

• Comfortable homes: You don’t have to live with cold drafts or inefficient appliances. Instead, you can save money for future improvements. A home that is energy efficient can help to prevent allergies and other health risks such as mold.

• Increase in potential resale values: EnergyStar.gov says that a home that is energy efficient can increase its resale price by 2% to 8%.

• Limitless lender options: EEMs aren’t as popular as other types home loans.

• Some projects may not be eligible. The eligibility limit is energy-efficient upgrades. You might have other options if you are looking for cosmetic or structural improvements that do not involve energy efficiency.

• Approvals and Paperwork: Paying cash may be easier than using an EEM to finance small projects.

Alternatives for energy-efficient mortgages

You might need to borrow more money than what is allowed by the EEM, or you may not want to deal the paperwork. These are some other mortgage options to consider:

• Renovation loans. These three types of loans can be used to finance major and minor home improvements. There are three options: the FHA 203(k), insured by the Federal Housing Administration; the HomeStyle loan, guaranteed Fannie Mae; and the CHOICERenovation Loan, guaranteed Freddie Mac.

• Cash-out refinance. Cash-out refinance: If your home is owned, you can take out a loan that exceeds your mortgage balance and use your home as collateral. The difference between your new loan and your old mortgage balance is then paid in cash.

• Home equity loan. This allows you to tap into the equity in your home for cash. The home equity loan is paid in one lump sum. You then repay it at a fixed rate of interest over time.

• Home equity line credit. This credit option allows you to borrow against your home equity in a similar way as a credit card. Many HELOCs can be adjusted in interest rates.