Green mortgages are giving homeowners incentives to go green, one home at a time.

"It's not that easy bein' green/Having to spend each day the color of the leaves," sang Kermit the Frog. In the 1970s, the lovable Muppet poignantly sang about the troubles of his hue. Thankfully, times have changed-and homeowners in this decade are jumping at the chance to go green.

Bigger perks available with energy upgrades

Officially, they're called Energy Efficient Mortgages or EEMs, but they may be more commonly known as green mortgages. These are home financing programs designed to ease the burden of improving a home's energy efficiency, or of purchasing a home that's already so established.

Homeowners who use green mortgages obviously benefit from the long-term savings associated with living in an energy-efficient home. But there are other perks, too, mainly resulting from the underwriting of green mortgages:
  • Conventional EEMs. Conventional EEMs are available from mainstream lenders and qualify for Fannie Mae and Freddie Mac support. The guidelines of these agencies allow the lender to add the estimated energy savings to the borrower's income when calculating the maximum approvable loan amount. This essentially increases the amount for which the borrower can qualify.
  • FHA/VA EEMs. The FHA and VA allow borrowers to add the cost of energy upgrades to already approved mortgages, without requiring an additional down payment. The FHA caps allowable energy costs at the greater of $4,000 or 5 percent of the home's value up to $8,000; the VA allows for energy upgrades costing $3,000 to 6,000.
  • Other EEMs. Some independent lenders and credit unions are bundling their own perks into green mortgages. These vary widely by lender, but include cash rebates and lower interest rates. Columbia Credit Union, for example, offers savings of up to $1,500 for borrowers who qualify for its "Living Green Mortgage."

Green power

When the EEM is used to finance upgrades (rather than to purchase a home that's already upgraded), you'll need to have the home inspected by a residential energy efficiency professional; this will cost about $400. The inspector will measure your home's current energy rating, and provide detailed recommendations on upgrades that can improve it. The recommended upgrades usually involve things like adding insulation, repairing window and door seals, replacing inefficient appliances, and installing new windows. These recommendations and the associated cost estimates will be documented by the inspector in a Home Energy Rating System (HERS) report. Green mortgage lenders will ask to see the HERS report before the loan is approved.

If the EEM is going to finance the purchase of a home that's already energy efficient, you may be able to obtain documentation of the home's energy rating from its builder. Otherwise, a HERS report would be required, as well.

Someday soon, Kermit the Frog may change his tune and start singing about the joys of being green. Until then, it's up to homeowners to spread the word.

Published on September 3, 2008