What do Brad Pitt, Ed Norton, Leo DiCaprio, and Rachel McAdams have in common? Besides being famous Hollywood personalities, all of them are dedicated environmentalists. And believe it or not, the Federal Housing Administration (FHA) wants you to join their ranks.
Beginning early 2011, the FHA will be testing a new loan program that will finance energy-saving improvements in your home. Called the FHA PowerSaver, the program is slated to provide loans of up to $25,000 for qualified borrowers. According to the FHA, PowerSaver will be the first of its kind-an affordable, nationwide financing product designed specifically for green upgrades.
Green home equity loan
A PowerSaver loan will be a second mortgage, secured by your home equity. The amount of your home equity will also limit the size of the loan available to you. As defined in the program guidelines, you cannot use PowerSaver to leverage the home beyond its current market value. If your home equity is valued at $15,000, then PowerSaver could finance up to that amount, but not a penny more.
PowerSaver funds must be used only for approved upgrades, such as:
- Insulation installation (attic, walls, crawl space)
- Installation of storm doors and/or storm windows
- Installation of heating and/or air conditioning system
- Replacement of water heater
- Installation of solar panels
- Installation of metal or asphalt roof
Where applicable, these upgrades must meet Energy Star specifications to qualify for financing.
Competitive pricing, conservative terms
As with other FHA loans, PowerSaver will be offered by approved lenders and insured by the FHA. The insurance, which has a premium of 1 percent annually, protects lenders from loss on up to 90 percent of the loan balance. This protection should keep the interest competitive, in the 5 to 7 percent range.
The bad news is that not all borrowers will qualify. The somewhat conservative credit requirements include:
- Minimum credit score of 660
- No bankruptcy or foreclosure on credit history
- Maximum debt-to-income ratio of 45 percent
If you meet these requirements, you could potentially finance $25,000 for up to 20 years, depending on the nature of the upgrades. The funds are disbursed in two payments -- 50 percent upfront and 50 percent after the work has been completed.
If you don't meet these requirements, look into financing opportunities with your local and state governments. A standard home equity loan or line of credit may also be a viable alternative.
Green improvements should pay for themselves by reducing your ongoing energy costs and increasing your home's value. Since not all upgrades can be justified on this basis, get an energy audit to inform your decision-making. If your electric bill is less than $50 a month, for example, the potential savings associated with solar panels may not justify the cost. But upgrading your central heating unit and air conditioner may be a more appropriate choice.
Trim your expenses while you improve the value of your home, and you move one step closer to the lifestyles of the rich and famous. Today, part-time environmentalist. Tomorrow, savvy homeowner who's sitting on a valuable, energy-efficient asset.