An Energy Efficient Mortgage is a specialized home loan that enables borrowers to finance energy-efficient improvements to their homes during the purchase or refinance process. These improvements are designed to enhance a property’s energy efficiency and reduce energy consumption, resulting in cost savings for homeowners. EEMs are a part of the broader effort to promote sustainable, eco-friendly living and help homeowners invest in energy-efficient upgrades.
Energy Efficient Mortgages Are Powerful Loans Can Save You Money Monthly!
One of the primary benefits of an EEM is that it allows borrowers to roll the cost of energy-efficient improvements, such as insulation, high-efficiency HVAC systems, solar panels, or energy-efficient windows, into their mortgage.
By doing so, they can effectively spread the cost of these upgrades over the life of the loan, making it more affordable and manageable. This can be especially advantageous for homebuyers who want to purchase an older home in need of energy-related updates.
Energy efficient mortgages are typically available as either FHA EEMs or conventional EEMs, and they differ in some respects. FHA energy efficient mortgages are insured by the Federal Housing Administration and may require a lower down payment than traditional loans.
FHA home loans also have more flexible credit requirements. Conventional energy efficient loans, on the other hand, are offered by private lenders and follow conventional mortgage guidelines.
Energy efficient mortgages can provide numerous benefits to homeowners. They reduce energy consumption, resulting in lower utility bills and a reduced environmental footprint. Moreover, the improved energy efficiency can increase a home’s resale value, making it a wise long-term investment. Additionally, EEMs are often associated with favorable interest rates and terms, making them a cost-effective financing option.
To qualify for an energy efficient mortgage, borrowers must typically have a home energy assessment or audit performed to determine which improvements would be most beneficial. The cost of these audits can be rolled into the loan amount. Overall, EEMs are a valuable financial tool for those who wish to make their homes more energy-efficient while simultaneously enhancing their property’s value and reducing their carbon footprint.
Prospective homeowners who want to enjoy higher energy efficiency savings and possibly afford a larger mortgage have a great option – the Energy Efficient Mortgage.
An EEM is a mortgage that credits your home’s energy efficiency into the home loan itself. An EEM gives you the chance to finance energy-saving measures into one mortgage. Debt-to-income qualifying ratios on EEMs are increased so you can borrow a larger amount and enjoy a more energy-efficient home.
You can choose an EEM when you purchase a home. You also can get an EEM when you already own a home, want to refinance, and add energy-efficient improvements.
What Home Improvement Upgrades Are Eligible for an Energy-Efficient Mortgage?
The following environmentally-friendly home improvements might be covered under various energy-efficient mortgage programs:
Installing Solar Systems: Heating and air conditioning typically consume over half of a home’s energy. By installing solar panels, you can convert sunlight directly into electricity, reducing your usage of electric and natural gas, and subsequently lowering your utility bills.
Switching to a Programmable Thermostat: Smart thermostats provide more than the convenience of controlling your HVAC system via your smartphone. They can also learn your routines and adjust heating or cooling only as needed. ENERGY STAR certified smart thermostats can save about 8% on heating and cooling costs.
Adding Insulation: To reduce energy loss, insulating your home thoroughly, from the attic to the walls, is crucial. This not only lowers heating and cooling expenses but also enhances comfort during extreme weather.
Sealing Air Leaks: Sealing hidden air leaks in attics, basements, around windows, doors, and air ducts complements insulation as a cost-effective energy-saving measure.
Replacing or Updating Windows: Windows and doors serve as shields against wind, heat, and cold. Enhancing your windows with caulking, weatherstripping, adding storm windows, or installing exterior blinds can significantly reduce energy loss.
Improving Water Efficiency: Water heaters are a major energy consumer in homes. Replacing standard electric water heaters with ENERGY STAR high-efficiency models can lead to substantial electricity savings over the lifespan of the appliance.
Updating Appliances: Opting for energy-efficient models of major appliances like refrigerators, dishwashers, and washing machines can offer long-term savings. Although these appliances might have a higher initial cost, they are cheaper to operate compared to less efficient models.
What Are EEMs Used For?
An energy-efficient mortgage, or EEM, is a type of financing that incorporates the costs of specific energy-efficient upgrades into your mortgage, allowing you to distribute these expenses throughout the loan’s term. Energy efficient mortgages are available for both new homebuyers looking to finance energy-saving improvements and existing homeowners who wish to refinance and implement energy-efficient upgrades in an older, less efficient home.
EEMs usually are offered on homes that are energy efficient already – one example is an ENERGY STAR-certified home.
They are a good choice for homebuyers and homeowners mostly concerned with the long-term value of their home. People who have enough tax liability to take advantage of the tax-deductible interest also choose EEMs.
An EEM usually requires a home energy rating to give the mortgage lender the estimated monthly savings and value of the new energy efficiency modifications. This is called the Energy Savings Value. The FHA and VA offer EEMs, and some conventional lenders also offer them.
EEM Benefits
An Energy Efficient Mortgage offers many benefits for buyers, sellers, and remodelers and refinancers:
For Buyers
- You may be able to qualify for a larger mortgage on an energy-efficient home. For example, if your gross monthly income is $5,000 per month, the most mortgage you can usually qualify for is approximately 29% of your monthly income, or $1,450. The maximum mortgage is only $207,000.
- Maximum payment may increase to 33% of your monthly income, or $1,650. The maximum mortgage is $235,900. This much larger mortgage allows you to easily finance energy-efficient improvements.
- Enjoy a more comfortable and energy-efficient home for as long as you live there. With such improvements as an energy-efficient air conditioner and double-paned windows, for example, your home will be cooler and quieter. Buyers also enjoy cost savings on their energy improvements from the first day of ownership.
- May increase the potential resale value of the home with your energy savings. More Americans today value energy efficiency and may be willing to pay more for a home with energy efficiency already built-in.
For Sellers
- Americans value energy efficiency more than ever, so you may be able to sell your home faster.
- The home is more affordable to own over the years, with many homeowners reporting hundreds or thousands of dollars of energy savings per year.
- Energy-efficient homes attract more attention in a hot real estate market.
For Remodelers and Refinancers
- Enjoy the lower cost savings of an energy-efficient home without moving when you remodel or refinance.
- Make home improvements that save you on your monthly electric bills.
- The value of your home may increase, which helps when you decide to refinance again or sell.
How to Get an Energy Efficient Mortgage Loan
To qualify for an EEM on your home loan, a home energy assessment is required.
The assessment provides recommendations on how to improve the home’s energy efficiency. The home energy assessment estimates how much money will be saved annually in energy costs, as well as the cost of the improvements.
The home lender is required to use the information from the home energy assessment to determine how much you will save in energy costs with the improvements.
Types of Energy Efficient Mortgages
Conventional
A conventional EEM boosts the buying power of purchasing an energy-efficient home by allowing the conventional lender to boost the borrower’s income by a dollar amount that equals the estimated energy savings. You can also secure an energy-efficient mortgage through conventional loan programs. Programs like Fannie Mae’s HomeStyle® Energy Mortgage.
Freddie Mac announced a new EEM program, but they do allow some underwriting flexibility for energy-efficient home improvements. The Freddie Mac’s GreenCHOICE Mortgage® was designed to finance the purchase of a new home or refinance an existing home to include eco-friendly improvements.
The HomeStyle® Energy mortgage program enables upgrades like installing solar or geothermal systems in either new or existing homes. Additionally, this program can be combined with the HomeStyle® Renovation and HomeReady® programs for more comprehensive financing options.
Federal Housing Administration (FHA)
The home loan amount for an FHA EEM can be boosted by the cost of the energy improvements in the home. The maximum amount of the EEM for energy improvements is the lesser of 5% of:
- The value of the home;
- 115% of the median area price of a single-family home, or
- 150% of the conforming Freddie Mac limit
You do not need to make an additional down payment to qualify for an FHA EEM, and FHA loan limits are not an obstacle to getting an EEM. FHA EEMs can be obtained for site-built and manufactured houses.
Department of Veteran’s Affairs (VA)
The VA EEM is available to active military, reservists, and veterans to make energy improvements when they buy an existing house. The VA puts a cap on energy improvements at $3,000 to $6,000. Borrowers should speak to their VA lender about a VA EEM at the start of the lending process.
Energy Efficient Mortgage Case Study
A family decided to refinance their 35-year home to lower their interest rate on their FHA loan. Their mortgage provider suggested they get an energy assessment on the house so they could finance their energy improvements in the new mortgage.
The lender boosted the FHA loan value by $8,760 to cover the energy improvement costs. The final loan was $176,400, which was higher than they could get before. Home improvements included:
- Double-paned windows
- Wall insulation
- Ceiling insulation
- Furnace duct repairs and insulation
These improvements, combined with the lower interest rate, gave the couple $230 per month in savings. They also reported the home is quieter, more comfortable, and they hardly needed to use the furnace in the winter.
The Bottom Line with Green Energy Mortgages
Getting an Energy Efficient Mortgage makes a lot of sense. You can finance energy-efficient improvements into your home, get a larger mortgage, save on energy costs, and increase the resale value of your home. Talk to your lender about an Energy Efficient Mortgage today and see what you can save.
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About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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