Green Mortgages - Energy Efficient Mortgage Guide

By: MortgageLoan.com (Multiple Contributors)
Updated and reviewed: April 25, 2014

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Introduction

What’s a “Green Mortgage”? It is a term that many, even the most environmentally focused of us, have not heard before. And it’s not what you might think. It is not a marketing or public relations effort. It is a program backed by private and government mortgage programs designed to help you make your home more energy efficient.

Green, or “Energy efficient” mortgages, let you borrow extra money to pay for energy efficient upgrades to your current home or a new or old home that you plan to buy. The result is a more environmentally friendly living space that uses fewer resources for heating and cooling and has dramatically lower utility costs. The types of things that are covered include upgrades that you may have thought you couldn’t afford like double paned windows, tankless water heaters, modern HVAC systems, and new insulation.

At this time, Energy Efficient Mortgages aren’t second mortgages. Though they are created separately from your primary mortgage, they are ultimately rolled into your primary mortgage—so you only make only one payment per month.

Like most people these days, you probably already do your share of “green” practices like recycling and turning off the water when you brush your teeth. But you probably thought that really big things, like renovating or upgrading your home to make it more energy efficient were financially out of your reach.

Here are a few facts that will give you an idea of how upgrading your home can help save you a lot of money and reduce your home’s carbon footprint:

  • Overall, heating and cooling accounts for 50–70% of the total energy used in the average American home.
  • 60% of the existing homes in the US are not properly insulated.
  • Updating your home’s insulation can save you up to 20% on heating and cooling costs or up to 10% of your total yearly energy bill.
  • According to the Department of Energy, energy loss from outdated windows accounts for nearly 25% of the annual heating and cooling costs for the average American home.
  • Even the most basic double-paned window can reduce energy use by up to 24% in cold climates during the winter and by up to 18% in hot climates during the summer.
  • In houses with central air and heating, about 20% of the air is lost due to faulty, outdated duct work.
  • A new Energy Star-rated dishwasher can save you up to 13 energy (the dishwasher accounts for 2% of your gas or electric bill) and as much as 1,200 gallons of water a year.
  • Programmable thermostats can save about 2% on heating bills and more than 3% on cooling bills. These numbers can translate into savings of up to $180 a year.

Green mortgages are a concrete way for families to both save money and make a large scale change in the way that they live their lives in regard to the environment. Green Mortgages, either as part of a mortgage refinance or added on to a new mortgage, are a smart way to pay for energy efficient features to your current house, a house that you plan to buy, or to get credit for the features that your new home already has.

Making your house more energy efficient isn’t just about helping the environment and saving you money. Energy efficient homes are cooler in the summer and warmer in the winter, cost less to maintain, have lower monthly utilities costs, and generally last longer. Overall, an upgraded home is more comfortable all around. This means not having to deal with drafts in the winter, not worrying about the cost of cranking the AC when company comes over, and having peace of mind that your children, pets, and older visitors will always be in a comfortable, healthy environment.

Green Mortgages can help you do the following:

  • Get money to invest in energy efficient upgrades for a new house.
  • Help you to qualify for a larger mortgage to pay for a house that is already energy efficient.
  • Qualify you for money for green renovations when refinancing a mortgage.
  • Make older homes more comfortable and more affordable with lower utility payments.
  • Help you to use less energy to maintain the temperatures in your home and therefore lessen you family’s footprint.

Whatever your reason for wanting to pursue this type of mortgage, the results are the same: a more comfortable, energy efficient, environmentally sound home that is cheaper to maintain and has lower monthly utility costs.

Purpose of this Guide:

You don’t have to be a mortgage guru to use and understand this guide—and even if you are, you will be able to pick up some useful tips. You should find this guide helpful whether you are looking for a new home, refinancing an old one, or just want to know more about Energy Efficient Mortgages. After reading this document, you will have a better understanding of:

  • Energy Efficient Mortgages
  • Who they benefit
  • What they can pay for
  • How to get one
  • Why you might want to get one
  • Why these upgrades really matter to your wallet
  • Why these upgrades matter to the environment

Part 1: What is an Energy Efficient Mortgages?

In this section, we dive into the ins and outs of Energy Efficient Mortgages, how you can qualify for one, and how you can get one.

What is an Energy Efficient Mortgage?

Oftentimes, the terms “Green Mortgage” and “Energy Efficient Mortgage” are used interchangeably. The official term for this type of loan, though, is Energy Efficient Mortgage or EEM for short. Use the term EEM if you are doing research online or talking to your lender to make sure that you are getting information on the right kind of loan. The main idea behind these types of mortgages is very simple and doesn’t directly have a whole lot to do with saving the environment: Energy efficient homes use less energy and are therefore less expensive to own. People who have more efficient homes spend less per month on utility costs and theoretically should have more to spend on their monthly mortgage payments—and can therefore afford a larger mortgage.

At this time, an EEM is not a second mortgage. It is something that you get in addition to your regular mortgage or mortgage refinance and roll into your primary mortgage. That means that you only make one mortgage payment every month and there’s no additional lien on your property for it.

If you are purchasing or building a home that you want to add energy efficient features to, you would first get approved for a regular mortgage for the purchase. Then, you would get an EEM—to be rolled into that mortgage—to pay for energy efficient upgrades.

If you are refinancing a mortgage for a home that you already own and you want to add some energy efficient renovations, you would again get the EEM to be rolled into the new mortgage.

Lastly, if you are purchasing a new home that already has energy efficient qualities, lenders recognize that your utility payments will be lower and will let you qualify for a greater overall mortgage amount. EEMs can be applied to most home mortgages.

And to make things even easier, you don’t have to do anything to qualify for an EEM. In fact, if you already qualify for your main mortgage, you will (in most cases) also qualify for an EEM. And to make it even easier, especially if you are strapped for cash after the purchase of a home, you don’t have to make an additional down payment on the EEM.

EEMs are insured by the Federal Housing Authority and the Veterans Administration (for past and present military personnel) and by the conventional secondary mortgage market (Fannie Mae and Freddie Mac). You get an actual EEM in the usual places: mortgage companies, bank, savings and loan associations, and other lending companies.

What’s an example of how an EEM can work for you?

One of the best ways that an EEM can work for you is to increase your purchasing power and allow you to qualify for a larger mortgage. If you are purchasing a home that already meets standards of energy efficiency, you will pay lower monthly bills. As a result, a larger percentage of your income can be applied to your mortgage when it comes to calculating the total amount that you qualify for. According to the HUD website, on an FHA EEM, you can qualify for up to 33% of your debt to income ratio (that's the new mortgage payment, plus any existing loan payments vs income) with an EEM but only 29% without.

Here’s an example of how this works from the HUD website:

If a buyer’s total monthly income is $5,000. Then, their maximum allowable monthly payment at 29% is $1,450. And the maximum mortgage that they can get is $207,300

HOWEVER, with an energy efficient home:

The maximum allowable monthly payment for the same person at 33% is $1,650. And the maximum mortgage that they can get is $235,900. That amount makes a huge difference in the kind of house that you can afford! At the same time, your monthly bills will be lower, so you can actually afford it.

Are there different kinds of EEMs?

Yes, there are actually three different kinds of EEMs. You will need to talk to your lender about which one makes the most sense for you:

  • Conventional EEM: This type of loan is offered by lenders who sell their loans to Fannie Mae and Freddie Mac. It is the most powerful of the EEMs as it allows you to borrow up to 15% of the home’s appraised value for improvements.
  • FHA EEM: This type of EEM is not as powerful as the conventional EEM, but you will be able to take advantage of the benefits of FHA financing. You can borrow up to the lessor of a)5% of your home’s value; b)115% of the median area price of a single family home; or c)150% of the conforming Freddie Mac limit for that area.
  • VA EEM: This version of the EEM Mortgage is for past and present military personnel and allows you to spend up to $6,000 for energy efficient upgrades when purchasing an existing home regardless of the value of the home.

Lenders can potentially offer all three types of EEMs.

So, what kinds of things does an EEM pay for?

An EEM can pay for improvements like new dual pane windows, a new HVAC unit with air ducts, insulation, weatherizing, energy efficient heating and cooling systems, fixing or replacing a chimney, installing active and passive solar technologies, and other upgrades.

How much money can I spend on improvements?

Unfortunately, the sky is not the limit with the upgrades. According to federal guidelines, the maximum that you can add to the mortgage is either. So, you will probably be able to upgrade the insulation on your home but may have to let go of your dream of a full solar panel roof!

Who offers them?

EEMs are offered by most mortgage lenders through federally insured mortgage programs like FHA and VA as well as secondary mortgage market lenders like Fannie Mae and Freddie Mac. Lenders can offer conventional EEMs, FHA EEMs, and VA EEMs. All of them offer slightly different plans and you should talk to a few lenders

Who is eligible?

Basically, if you already qualify for a regular mortgage, then in most cases you already qualify for an EEM. For the EEM to be eligible for inclusion in the mortgage (different from the buyer being eligible), the actual energy efficient improvements must be cost effective. This just means that the total cost of the upgrades has to be less than the total value of the energy saved over the operative life of the improvement. So, if a new double-paned window costs $300, it needs to save over $300 in energy costs of the course of its life.

How do you get an EEM?

To get an EEM, you first have to find out what improvements your home needs. And, though you may have had your eye on a new central air unit and other upgrades that you think you need, you have to follow the official suggestions. These suggestions come in the form of a HERS report. HERS stands for Home Energy Rating System and it’s an evaluation of how energy efficient a home is. A trained Energy Rater goes to your home and completes an inspection to find out just how energy efficient it is. The rater will take into account factors like insulation, windows, heating and cooling systems, and local climate to give the home an overall rating. You will work with your lender to find a licensed Energy Rater.

A HERS report includes:

  • An overall rating for the house as it is.
  • Recommendations for cost-effective energy upgrades.
  • Cost estimates of the price, savings, and life of energy saving upgrades.
  • An estimate of the house’s rating after the upgrades.
  • Before and after estimates of annual energy costs for the home.

A HERS rating costs somewhere between $300 and $800 and you can finance it as part of the loan if it isn’t paid for by the buyer, seller, lender, or real estate agent.

Once I have my HERS, how does it all work?

Once you have your HERS inspection, you can figure out how much money you qualify for and what upgrades you want to spend the money on. So, maybe you can get that new central air unit after all! Once the actual EEM has been worked out with the lender and the loan closes, the lender puts the money into an escrow account. The mortgage owner then has between 90 and 180 days (depending on who provides the EEM) to hire professionals to make the improvements. You can do some of the improvements yourself to save money, but you cannot pay yourself to make the renovations. The money is then paid out to the borrower once an inspection takes place to verify that the proposed improvements have been made and the energy savings are real.

Part 2: Who needs an Energy Efficient Mortgage?

Three scenarios to help you to understand when it makes sense to get an EEM.

Example 1:

Nicole and Chad bought their home ten years ago. Though they love their house, it is older and hard to keep warm in the winter and cool in the summer. After a winter of particularly crippling heating costs, they thought about selling and moving to a more efficient home. Ultimately, though, Nicole and Chad decided that they loved their neighborhood too much to move and looked into what they could do to upgrade their home to make it more energy efficient. After extensive internet research, they decided that they needed to insulate their attic, replace all of their windows with double-paned windows, replace their central heating and cooling system, and repair the duct work. Unfortunately, they did not have enough cash in savings to get all of this work done at once. After talking to a broker friend about their situation, they realized that if they refinanced their mortgage to take advantage of lower interest rates, they could qualify for an EEM to pay for the improvements without any money out of their pockets except for the refinancing fees and the HERS report. When Chad and Nicole finally got their HERS rating, they found that they not only qualified for most of the energy efficient upgrades they wanted, but the report also suggested some other upgrades that they hadn’t considered. Now, Chad and Nicole are happy with their home and glad that they didn’t go through the nightmare of selling their home, purchasing a new one, and moving. Their home is more comfortable year round and because they refinanced, they also have a lower overall mortgage payment every month.

Example 2:

With a new baby on the way, the Miltons have more than outgrown their starter home. They decide to build a new three bedroom home two towns away in a better school district. In this town, they have a choice of two different builders. The first builder does not invest the time or effort to make his homes as energy efficient as they could be. However, his homes are less expensive—at least in the short term. The second builder invests the time and materials to create greener, more energy efficient homes. Unfortunately for the Miltons, the asking price on those homes is just out of their reach. The Miltons crunch the numbers and compare the two similar homes. It’s not surprising that they find that the utility costs for the more energy efficient home are much lower. They are surprised, however, when they talk to their loan officer and find out that because the greener home costs less to maintain each month, the Milton’s can actually qualify for a larger loan to pay for the home if they add an EEM to their regular mortgage. In the end, the family gets a larger mortgage to pay for the greener home. They also get the space that they need for their growing family and save money with lower monthly costs. Also, the temperature in their home is more consistent in all seasons which gives them peace of mind while trying to keep their young brood comfortable and healthy.

Example 3:

Brian loves the details, solid building techniques, and design of older homes. He has fallen in love with a house in his neighborhood that was build in the 1920’s. The place is very charming, but it is in need of a serious overhaul to prevent it from being a utility money pit. It desperately needs improvements like an HVAC system (it previously just had window units), double paned windows, and extensive insulation. This isn’t Brian’s first house purchase. His last house also needed some repairs and he simply asked the seller to add the upgrades on as part of the purchase agreement. Unfortunately for Brian, he isn’t the only one who has eyes for this particular house. The market in this area is extremely competitive and he is finding that he may not be able to offer as much money as some other buyers. His lender suggests that he stay competitive with other buyers who may have deeper pockets by applying for an EEM on top of his regular mortgage to finance the cost of repairs in his offer price. This ends up making his offer more attractive than others because the seller, who is an elderly gentleman, doesn’t have to do the repairs himself. Also, Brian, who is particular about his houses, can get the repairs and upgrades that he really wants instead of suffering through whatever cheap repairs that the seller tries to make. Three months later, it is the dead of winter and Brian is living in his new home. He enjoys the old world feel and character of the house, but he doesn’t have to deal with an endless struggle to heat the house and be comfortable.

Conclusion:

Hopefully this guide has helped to give you an understanding of Energy Efficient Mortgages. If you’ve ever suffered through extreme weather in an inefficient home, you can instantly recognize the value of these kinds of loans. Pursuing an EEM can help you to feel more in control of your budget, your environment, and your family’s impact on the environment. The ideas behind EEMs are fairly simple. However, as with any complicated financial agreement, the actual loans include some complexities and subtleties not covered here. While this guide is a great way to get an overview of EEMs we invite you to visit some of the links below to get a complete picture. We’ve also included links to further information on Energy Efficient home improvements and living a greener life. For more information, please read our EEM lender guide by state.

EEM Lender Guide by State

Continue to our guide to local EEM lenders.

Part 3: Green Mortgages for Small Businesses

 

Part 3: Green Mortgages for Small Businesses

So far, we’ve talked about the benefits that Energy Efficient Mortgages can have for homeowners, but what about small to mid-sized businesses?
 
Greening efforts and retrofits help improve the bottom line of any business with lower operating costs. Also, consumers are more likely to patronize green businesses. Javelin Strategy & Research found that 43% of consumers are more likely to do business with green companies.
 
Sounds like a good deal: help the environment, improve the bottom line for your business with lower expenses, and create a compelling reason for customers to choose you over a competitor.
 
Unfortunately, and surprisingly, there are currently no direct commercial versions of Energy Efficient Mortgages.
However, there are alternatives that provide the basic benefits of Energy Efficient Loans for businesses.
 
In this section, we’re going to talk about:
  • Small Business Administration Loans including the 7(a) loan and the SBA 504 loan
  • State energy efficiency financing programs
  • Commercial PACE loans
 
Some things these programs can help you to accomplish:
  • Retrofit facilities
  • Purchase energy efficient equipment
  • Utilize energy efficient construction
  • Buy alternative fuel for vehicles
  • Replace a transportation fleet with hybrid and improved-mileage vehicles
  • Increase efficiency with a new HVAC, heat pumps, and insulation
  • Install energy efficient power and light bulbs
  • Utilize new sources of energy including wind, solar, and geothermal
  • Install energy efficient doors, windows, and skylights
 
Part A: Small Business Administration Loans
The U.S. Small Business Administration is an independent agency of the federal government formed to help Americans start, build, and grow businesses. The SBA does not actually make loans, but it does guarantee them. A number of banks and other lending institutions offer these SBA guaranteed loan programs to help small businesses. Applicants must meet the lender’s criteria and requirements as well as those of the SBA.
 
The two standards that the SBA uses to define a “small business” are: 500 employees and $7 million dollars in average annual receipts for non-manufacturing industries. There are many exceptions, though, so be sure to check out the SBA website for more details to see if you qualify as a “small business.”
 
504 Loan Program: This program is designed for small, brick and mortar businesses that need financing for fixed assets like real estate or equipment. It can also be applied to fixed asset projects like purchasing land and constructing new facilities or modernizing or renovating existing facilities.
 
There is a new version of the 504 Loan called the Green 504 which doubles the maximum amount that a business can get from $4 million to $2 million with a 10% down payment. To get this higher amount, the business must be purchasing, constructing, or retrofitting facilities with energy saving technologies that result in at least a 10% decrease in energy consumption. Also covered are projects to generate renewable energy like solar and wind. 
 
7(a) Loan Program: This is SBA’s primary program to help start-up and small businesses to obtain financing when they might not be eligible for loans through normal lenders. Though it isn’t specifically earmarked for energy efficient projects like the Green 504, it can be used for green projects. These loans are for a maximum of $2 million
 
Part D: State energy efficiency financing programs
Most states offer low interest loans and other subsidies to help small businesses to become more energy efficient. To find out about what programs are available in your area, go to the NASEO website (National Association of State Energy Officials) and click on your state:
 
One example, to give you an idea of the benefits, is the Efficiency Maine program offered by the Finance Authority of Maine (FAME). This program provides small businesses with up to $35,000 at 1% interest to help with approved energy conservation measures with closing costs capped at $500.
 
Part E: Commercial PACE loans
Though PACE (Property Assessed Clean Energy Program) was essentially halted in the summer of 2010 due to the FHFA and Freddie Mac/ Fannie Mae, the idea is a good one. Started in Berkeley, CA in 2005, it’s a municipal financing system where property owners get loans for energy efficient upgrades to their property for things like solar panels, energy efficient windows, and insulation. The owner then pays off the loan through increased property taxes over a set number of years. If the owner sells or leaves the property, the new owner takes on the payments as he or she will now be enjoying the energy efficient benefits.
 
To get a PACE loan, the property must be located in a municipality that has adopted a PACE ordinance. The process for getting the loan is similar to an Energy Efficient Mortgage in that an inspection takes place by a certified rater who determines what procedures are approved for the property. The amount available depends on the area that the business is located in, but the largest PACE loan approved so far has been $6 million.
 
The program was put on hold by the Federal Housing Finance Agency in July, 201 because they felt that it was too risky. Still, states like California and Maine are making serious strides to bring it back.
 
Conclusion:
While this guide is a great way to get an overview of programs that can benefit small businesses, we invite you to visit some of the links below to get a complete picture. As with the main guide, the actual loans include some complexities and subtleties not covered here.