You love the house! Maybe it’s a mid-century classic in a great area neighborhood or a sweet little bungalow in a trending area filled with new restaurants and entertainment. Whatever living space you envision, you’ll probably need a mortgage or a loan to make your dreams come true to purchase a new home. While the possibilities are dizzying, when you seek out financial advice, be sure to check into a remarkable money tool, an Energy Efficient Mortgage (EEM) to make your money go further both in spending and saving.
What’s an Energy Efficient Mortgage?
An EEM is a 15-year, 30-year or Adjustable Rate mortgage available from any FHA approved lender. After your mortgage, utility bills are the highest costs a homeowner faces. Consequently, it makes great financial sense to bundle the cost of better energy efficiency into the monthly mortgage payments in order to save money on the monthly utility payments. In essence, it’s an opportunity to borrow more money in order to save money on utility bills in the years to come.
An EEM is not a second mortgage, but instead, is created separately, and then rolled into the primary mortgage, so only one payment is necessary every month. Sometimes called a ‘Green Mortgage,’ an EEM offers lower utility costs, more comfortable living, as well as greener living, (i.e. using less fuel, and making the fuel you do use work as efficiently as possible). The loan is particularly suited for buyers who prefer the look and feel of an older home, but want more efficient mechanical systems and building materials to warm and cool the house. Buyers of new homes can also benefit, since lenders recognize the fact that houses with high energy efficiency have lower utility payments. This helps qualify lenders for a larger mortgage amount – in essence more money becomes available, boosting buying power.
Projects that Qualify for an EEM
The kinds of energy-efficient improvements (those deemed ‘cost-effective’) that can be bundled with the primary mortgage include replacing the entire heating/cooling system in a house, insulating the attic or basement, replacing duct systems, replacing doors and windows, chimney repair or replacement, or installing solar technologies or other renewable resource energy technologies into the home. The Energy Efficient Mortgage is for homebuyers, while the closely related Energy Improvement Mortgage (EIM) is available for current homeowners interested in refinancing their mortgage.
Show me the Savings
As a quick example, compare a conventional mortgage for a $100,000 house to a mortgage with energy improvements bundled in. For $10,000 these improvements can provide a new furnace and heat pump, as well as all new windows and doors. While the initial cost of the mortgage is higher, the energy efficiency given over the course of the payment could be anywhere from $20 to $70 in savings per month. Over 15 years, that’s a difference of $3,600 to $12,600 in cash savings. Additionally, when it comes time to sell the property, these energy efficiencies are already in place – so they have served the current owner as well as built resale value into the house from the very first day of possession. There’s a potential tax savings as well, since the interest paid on a mortgage is tax-deductible.
Almost any buyer who qualifies for a home loan qualifies for an Energy Efficient Mortgage, and in some cases, buyers may qualify for a larger loan. The opportunity to obtain an EEM does not depend on the location, size, or cost of the house. Additionally there is no age limit (upper age limit), and no set income amount needed to qualify. However, a cash investment of 3.5% of the purchase price is required. You should also be aware there are three different kinds of EEMs, the conventional EEM, which allows you to borrow up to 15% of the value of your home for improvements, and the less powerful yet still effective FHA EEM and a VA EEM, in which there is a smaller limit on the percentage you can borrow.
The EEM is available for new construction, as well as existing 1 to 4 unit single-family residences whether they are detached houses, townhouses or condominiums. (Some restrictions apply to condos; check on the HUD website for more information.) Originally there was a cap of $8,000 to EEM mortgages, but that has since been lifted, although other qualifying factors apply. For example, the amount of the loan cannot exceed the estimated savings of the energy efficiency improvements.
How do I start?
One of the first places to start investigating an Energy Efficient Mortgage could be with an energy audit, for which you can hire a professional or perform yourself. An audit will count up the cost of the energy use in your home, considering the age of your heating/cooling systems, the efficiency of your appliances and the amount of insulation (or lack of it), as well as other factors in the house.
Another possible starting point is a HERS (Home Energy Rating System) assessment. HERS is the standard index for calculating a home’s energy efficiency. A HERS analysis is conducted by a professional who considers the home’s energy efficiency, comfort level and carbon footprint. The lower the score, the more efficient the house energy-wise. The cost for this analysis can run from $500 to $800, a cost that could be paid by the buyer, seller, or split between them. This fee may be able to be included into the mortgage itself, amortizing its cost while paying for itself over the course of many months.
A great deal of additional information is available from the US Department of Housing and the US Department of Energy on Green Mortgages. But like any major financial undertaking, it’s best to work with a mortgage professional/loan officer familiar with EEM regulations to help you obtain the best arrangement for your situation whether you’re building, buying or renovating.