Ballpark Estimate: $300 for an energy evaluation, plus up to 15% of your home’s value
What if your mortgage lender offered to help you finance some simple improvements to your new, or existing, home that would improve its overall efficiency and at the same time reduce your energy bill so that even with the additional mortgage expense, you still came out ahead each month? If this scenario sounds like something you’d like to pursue, you may want to learn more about Energy Efficient Mortgages, also known as EEMs, and find out if they could be an appropriate option for you.
What Is an Energy Efficient Mortgage (EEM)?
An Energy Efficient Mortgage is a mortgage that provides additional money (beyond the regular financing of your home) to pay for some specific renovations that, when completed, will make your home more energy efficient so it will cost less to operate. The goal of this program is to encourage more people to take steps to help reduce energy consumption in the United States and also to eliminate energy-related pollution.
There are several ways that an Energy Efficient Mortgage can work in your favor.
- First, if you are buying a new home or refinancing an older one, you can use an EEM to cover the costs of making key energy efficient improvements. To do this, you will not need to qualify for a higher loan or include any portion of this amount as part of your down payment. Further, since the money for these improvements will be factored into your mortgage, you generally don’t have to pay any out-of-pocket expenses. You will, of course, make a higher mortgage payment each month to account for the additional cost financed into the loan, but keep in mind that the improvements will actually reduce your energy bills more than the extra mortgage amount adds to your monthly payment. This means that your overall expenses each month will still be lower as a result of participating in this program. So if your monthly budget is tight, investing in these improvements can actually make your dollar stretch further.
- Another use for an Energy Efficient Mortgage is to help you qualify for a larger mortgage. This is because with an energy-efficient home, your monthly expenses will be lower than if you lived in a standard home. That means you will have more expendable income at the end of each month that you put into a higher mortgage premium. As a result, people with energy-efficient homes can qualify for a higher debt- to-income qualifying ratio and can actually buy a more expensive home if it includes some important energy-saving features.
- Finally, a home that has energy-saving options installed has an increased value, so the money you put into your home not only benefits you up front and on a monthly basis, but can also be a wise financial move to protect your investment over the long term.
It is important to note that Energy Efficient Mortgages can be used on new construction or on older homes, but in either case, they are only appropriate if the improvements will save more money on a monthly basis, as well as over the life of the loan, than they cost to make in the first place. This means that not all changes will qualify under this program. The type of changes that can typically improve the energy efficiency of a home include insulation, certain appliances and special windows.
Different Programs, Similar Goal
You may be surprised to learn that Energy Efficient Mortgages have been in existence for more than 20 years, but have only recently come into the spotlight as more people look for simple changes they can make that will have a big impact on the environment. There are currently a range of Energy Efficient Mortgage programs available in most states, and they can vary a bit depending on the location. Despite some small differences, however, the overall premise behind most EEM programs is the same. Here are three of the basic EEM programs and some highlights of how they operate:
Conventional Energy Efficient Mortgage
These loans, which can be accessed through mortgage providers that sell their loans to Fannie Mae and Freddie Mac, are added to a traditional fixed- or adjustable-rate mortgage to pay for specific energy improvements when you buy a new home or refinance an existing one. You may finance up to 15 percent of the home’s value to cover the expense.
FHA Energy Efficient Mortgage
The Federal Housing Authority insures Energy Efficient Mortgage loans for first-time home-owners and those with lower incomes who meet their criteria. This program, which is available through many banks, credit unions, mortgage companies Cost For An Energy Efficient Mortgageand other lenders, is also a good option for people living in disadvantaged neighborhoods where they might otherwise have trouble getting financing. In addition, this loan can be used for manufactured homes. Keep in mind that there are limits on the size of the mortgage amount that qualifies under this federally backed plan that vary by location. It is also important to note that the costs of the improvements are also capped at either $4,000 or 5 percent of the home’s value up to $8,000, whichever is the higher amount, so this is a more limited program than the more conventional plan but is more accessible, too.
Veterans Administration Energy Efficient Mortgage
If you are an active member of the military, or are in the reserves or a veteran, you may be able to take advantage of the Veterans Administration (VA) EEM. Again, this program is more limited than a conventional loan, but allows you to finance 100 percent of improvements that will net a greater cost savings over the first year than the additional loan payment amounts. The amount you can borrow for this program is capped at $6,000.
The process of applying for an Energy Efficient Mortgage is relatively straightforward, but it does involve more paperwork than for a traditional loan. You also can’t apply for an Energy Efficient Mortgage after your mortgage is complete, so it’s important to get the ball rolling along with your regular mortgage application process. If you are interested in an EEM, the first step is usually to contact a lender in your area. You will also need to schedule an energy-efficiency evaluation to find out how your home compares to other, similar structures, and see if you can even qualify to go this route.
There are several ways that a house can be evaluated to see if it is energy efficient as is or would benefit from some strategic improvements. One of the most common approaches being used in most states today is the Home Energy Rating System (HERS). This system measures the potential value of improvements and weighs the costs and savings in several ways. The process usually begins with a certified inspector who comes to your home and rates it according to certain criteria to determine the overall energy efficiency and suggest strategic changes. The HERS report he or she generates also provides cost estimates for these improvements and determines how much money they will save. In addition, the report calculates the break-even point, or how long it would take for the savings to equal the amount spent in making these improvements. The findings are presented using a rating scale of 1 to 100, with 100 being the gold standard in efficiency.
The cost for an energy evaluation is about $300.
Once you find out if you qualify and, if so, have a list of suggested cost-effective improvements, you can work with your lender to determine which ones (or perhaps all of them) can be added to your mortgage amount. The money to pay for these improvements will usually be set aside in an escrow amount to be released after the improvements are complete. Keep in mind that some lenders set a time frame (usually three to six months) within which the work must be done.
What It Costs for an Energy Efficient Mortgage
To show you more how an Energy Efficient Mortgage works, let’s assume that you are purchasing a home that costs $200,000. If you put a 20 percent down payment on the home, you will be financing $160,000. If you want to include an additional amount to pay for energy-efficient improvements, with a conventional EEM you can add up to 15 percent of the house’s value, or $30,000, to the loan as long as the improvements Cost For An Energy Efficient Mortgagepass the cost-effectiveness test. The traditional loan payment for $160,000 at a fixed 6 percent interest rate for 30 years is a monthly $959.28 for principal and interest. (This does not include taxes and insurance.) The payment for the larger loan of $190,000 is $1,139.15. This is an increase of $179.87 a month to cover the improvements. When you consider that your utility costs will generally be cut in half, if you are currently paying $400 a month in energy bills, you can expect these to be reduced to $200 a month with the changes you implemented. This means that even after the additional $179.87 you are paying on your mortgage, you still save $20.13 each month in the end. While these costs are just rough estimates, they can at least give you an idea of how the program works.>
So in both the short term, as well as the long run, an Energy Efficient Mortgage will save you more than it costs.
If you qualify for an Energy Efficient Mortgage, you can also experience a tax benefit as well. Some strategic improvements will qualify for up to 10 percent of the cost (or up to $500 total) when you file your returns. Further, solar technology qualifies for a larger tax benefit of 30 percent of the cost, up to $2,000. Check with your tax professional to find out more about these and other tax breaks to see if they apply to your specific situation.
Also keep in mind that beyond the cost savings on so many levels, when you get an Energy Efficient Mortgage, you are taking a positive step to protect the environment. A typical home that implements energy-saving steps using an EEM will conserve the nation’s energy resources and will also result in lowering greenhouse gas emissions by as much as two to four tons every year.
So when you take the time and effort to make key changes through an Energy Efficient Mortgage, everyone wins.