What Is an Energy-Efficient Mortgage?

·7 min read

Living in an energy-efficient home is desirable for many reasons. Not only are energy-efficient homeowners taking steps to live more sustainably, but they are also likely saving money by using less energy. If you're planning to buy a home that meets energy-efficiency standards or you want to make sustainability-focused upgrades to your home, you can consider an energy-efficient mortgage, sometimes known as a green mortgage.

There are both conventional and government-backed EEMs on the market. Here is a look at how to get an EEM, the types of EEMs available, and potential upsides and drawbacks of this type of mortgage loan.

What Is an Energy-Efficient Mortgage?

An EEM allows you to borrow more money to finance a home purchase or refinance compared with a traditional mortgage and use the money over the purchase price to fund upgrades that will improve your home's energy efficiency and, in some cases, its water efficiency. If you are buying or refinancing a home that is already energy efficient, an EEM can still let you borrow more because the lender can factor in your utility savings.

The maximum amount of funding you can add to your loan may depend on the type of EEM and how much you'll save on utilities thanks to any changes. You may be able to use the funds generated by your EEM to pay for programmable thermostats, solar water heaters, water-saving toilets and a host of other changes.

"These programs are definitely starting to pop up all over the place due to popularity and global warming concerns," says Jenna Gray, senior vice president of mortgage lending and branch manager for Guaranteed Rate.

Although you might have higher mortgage payments with an EEM, the additions or updates financed in the mortgage will ideally generate enough savings to make up for the higher loan amount.

"Typically, homeowners who live in areas where energy costs are high benefit the most from green mortgage loans," says Jacob Channel, senior economic analyst at LendingTree. "For example, someone living in a hot city like Phoenix, Arizona, could potentially save thousands of dollars over the years in lower electricity bills by making their home more energy efficient."

How Can You Get a Green Mortgage?

When purchasing a home, you'll need to get approved for a mortgage and then secure an EEM from your lender to increase your spending power for renovations. If you already own a home, an EEM could be an ideal alternative to traditional financing options like home equity loans and lines of credit.

[Read: Best Home Improvement Loans. ]

Getting an EEM may require extra review and approval to make sure your home meets or can achieve energy-efficiency standards. You will sometimes need a home energy assessment from a qualified assessor. For example, Home Energy Score Certified Assessors and home energy raters certified by the Residential Energy Services Network work throughout the country.

An energy report should help determine what upgrades are possible and estimate both how much they will cost and how much savings they would produce.

"There are rules and restrictions on what will be deemed acceptable for financing, so the homeowner does not have full autonomy to decide 100% on what can or can't be done," Gray says.

What Types of EEMs Are There?

Green mortgages are available from private lenders, the Federal Housing Administration and the Department of Veterans Affairs.

-- Private lenders. Fannie Mae and Freddie Mac, which are privately owned, government-sponsored companies, make EEMs available to private lenders with their HomeStyle Energy Mortgages and GreenCHOICE Mortgages, respectively. Both HomeStyle Energy and GreenCHOICE loans allow borrowers to finance improvements that cost up to 15% of the home's "as completed" appraised property value, which is the value the house should have after renovations. A borrower with a home valued at $300,000 could get up to $45,000 to spend on upgrades. If you pair your EEM with the Freddie Mac Home Possible mortgage or the Fannie Mae HomeReady mortgage, you could put as little as 3% down.

-- The Federal Housing Administration. The FHA's Energy Efficient Mortgage program, which became nationally available in 1995, can add extra funds to the borrower's purchase or refinance loan. The FHA requires that a home energy assessment finds changes to be cost-effective, which means you must save at least as much as you'll pay for the improvements. It may be possible to get financing up to the full cost of the upgrades. To get an FHA EEM, the borrower only has to qualify for the initial loan amount. The funding you receive for home improvements can cover materials, labor and other expenses.

-- The Department of Veterans Affairs. An EEM from the VA adds funding to a VA purchase or refinance mortgage loan. Loans often top out at $6,000, but can go higher. For EEMs worth between $3,001 and $6,000, the lender will need to conclude that decreased utility expenses are likely to offset increased mortgage payments. The lender can use information from sources such as utility companies or state agencies in its evaluation, according to the VA.

[Read: Best VA Loans.]

Without knowing a homebuyer's individual situation, it's hard to say which type of EEM is best, Channel says.

"For example, a veteran might benefit from seeking out a VA Energy Efficient Mortgage while an EEM from the FHA might be a better bet for a first-time or a lower-income homebuyer," Channel says. "Like with any mortgage, one size doesn't necessarily fit all, so if you're thinking about getting a green mortgage, you'll want to carefully consider your personal financial situation before applying for a specific program."

[Read: Best FHA Loans.]

What Upgrades Might Be Part of an EEM?

There are a variety of renovations that might be covered by an EEM, including:

-- Adding solar, wind or geothermal power.

-- Getting double-pane windows.

-- Repairing or replacing furnace ducts and insulation.

-- Installing items to improve water efficiency.

-- Making weatherization improvements.

-- Making repairs to recover from environmental disasters.

What Are the Pros and Cons of EEMs?


-- Go green. If you're concerned about the environment, an EEM could be a great financial vehicle for you. Green mortgages can be a good idea even for homeowners "who don't currently spend a lot on things like electricity but who nonetheless want a home that's more environmentally friendly or a home that's better equipped to deal with things like climate change," Channel says.

-- Increase your loan amount. An EEM could provide you with a larger loan than you might get otherwise.

-- Get a low down payment option: HomeStyle Energy Mortgages and GreenCHOICE Mortgages "can be combined with Fannie Mae's HomeReady or Freddie Mac's Home Possible programs," Gray says. These programs, available to low-income buyers, require as little as 3% down.


-- Can take more time. The extra round of approvals you may need for energy-efficient renovations can prolong your mortgage process. "In a fast-paced market, they could be tough to use for purchases, unless the property had been on market for a bit and does not have other interested parties or bids," Gray says.

-- Not everything is covered. Depending on the type of EEM, you might find that upgrades you want to make are not covered.

-- Higher long-term loan costs. You might spend more money over the life of your loan because you're taking out a larger amount and have to make higher monthly payments, Channel says. Ideally, however, your lower monthly utility payments will make up for the increased mortgage costs.

Channel advises borrowers to weigh the pros and cons of EEMs before making a decision. "Be sure that the potential downsides, like a longer approval process or a larger loan, are worth the upsides, like lower utility bills or a more environmentally friendly house," Channel says.

[Read: Best Mortgage Lenders.]

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