Is there a connection between mortgage rates and energy efficiency? Although these topics may seem unrelated, a study by the University of North Carolina has shown that there is actually a strong correlation between the two. Researchers determined that people with energy-efficient homes were less likely to default on their mortgage, since the monthly savings provided by energy efficiency could be allocated towards their mortgage!
The study in question looked at a sample of 71,000 home loans from around the United States that were issued between 2002 and 2012. Based on this sample, homes with Energy Star certifications were 32% less likely to default on their mortgage than homes without these efficiency enhancements.
Why does this happen?
According to Cliff Majersik, executive director of the Institute for Market Transformation, the organization that funded the study, “It stands to reason that energy-efficient homes should have a lower default rate because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payment.”
These energy-efficient homeowners usually save around 15% or higher on utility bills. As these savings pile up month after month, homeowners are able to allocate more of their cash to their mortgage payments. Homeowners without Energy Star certifications are left paying expensive utility bills that take funds away from what could be going towards their mortgage.
How do they know it’s because of energy efficiency?
Many people may be skeptical that energy efficiency really does have such a strong impact on mortgage rates. That’s why researchers went to great lengths to eliminate other factors that could have caused this vast difference in mortgage default rates. For example, the study looked at house size, neighborhood income level, house value, unemployment rates, credit scores, and even local weather conditions that could add extra, unforeseen expenses. After going through each of these factors, the study found that the only true connection that remained was between energy efficiency and lower mortgage default rates!
What does this mean for the future?
Mortgage rates are determined based on the assumed risk that the lender is taking on by giving a homeowner money. Because this study showed that homeowners with energy-efficient homes are not as big of a risk to default, the authors of this study believe that homeowners who have Energy Star certifications should be given lower mortgage rates than those who do not.
Currently, lenders do not take Energy Star certifications into consideration when issuing loans to homeowners, although this could change in the future. In fact, the authors of this study, along with their sponsors, have already begun to reach out to Congress and government officials to see what can be done about this issue. The goal is to give these energy-efficient homeowners a break in one way or another, whether it be with lower mortgage rates or smaller monthly minimum payments.
The positive impacts of energy efficiency are endless, from helping the environment to putting money back in your pocket, and now, preventing you from defaulting on your mortgage!