This year's brutally cold winter has many people thinking longingly of spring. It also has them thinking about home energy improvements.

If you're looking to improve your home's energy efficiency, you may be able to do so through a "green mortgage." That's a type of home loan that's specifically designed to allow you to make energy efficiency improvements while incorporating the loan into your regular mortgage.

Count savings as income toward loan

One of the key features of energy efficiency mortgages (EEMs) is that they allow you to count your savings from energy improvements as income for purposes of qualifying for the loan. This allows you to qualify for a larger overall loan than you otherwise might be able to.

EEMs are available on mortgages backed by Fannie Mae, the FHA and the VA. On a Fannie Mae (conventional) loan, you can borrow up to 10-15 percent of the value of the home to be used for energy efficiency improvements. For FHA loans, you can borrow up to 5 percent of the home value ($8,000 maximum), while the VA has a fixed limit of $6,000 for energy efficiency improvements

Freddie Mac does not have a formal EEM program, but will allow energy savings to be counted toward income on some mortgages.

How it works

You can get an EEM either for a new home you are building or purchasing, or to make improvements on an existing home you already own. For an existing home, you have a certified energy rater perform an energy audit to determine the home's current energy efficiency, then make recommendations for improvements that will improve the home's efficiency.

The energy audit will score the home on a scale of 0-150 using what's called the Home Energy Rating System (HERS) index. On this scale, the lower the score, the more energy efficient the home. The average home currently rates about 130.

To qualify for an EEM, the proposed improvements must be cost-efficient compared to the home in its current state. So the larger a reduction in the HERS score that can be obtained through energy improvements, the easier it will be to qualify for an EEM.

You can also use an EEM to finance energy efficient features on a new home that you're purchasing or building. In that event, the energy audit will determine how the home's energy efficiency compares to a more typical home and uses that as a baseline for determining the financing you can obtain.

One single mortgage

An important thing to note is that EEMs are not home equity loans - they're not second liens that are added onto your existing mortgage. You obtain them either by refinancing your existing mortgage into an EEM to obtain funding to pay for energy improvements or by using an EEM to buy an energy-efficient home or to buy a home you plan to make improvements to.

This way, the cost of the energy improvements are rolled into your mortgage, which helps minimize interest costs and gives you only one monthly payment to worry about. Because the energy loan is part of your mortgage, you may also be able to deduct the interest on your federal taxes.

Published on March 3, 2014