Thinking About an Energy-Efficient Mortgage?
An energy efficient mortgage (EEM) is a type of home loan that gives the borrower certain additional benefits due to the energy efficiency of the home they're buying. Unlike a regular mortgage, homebuyers can use EEMs to finance energy-saving home improvements, like low-flow water fixtures, improved insulation, or fluorescent lighting. Energy-efficient mortgages can sometimes allow a borrower to qualify for a larger mortgage, even if their debt-to-income ratio (DTI) is higher than most lenders would usually prefer. That means an EEM might be able help you get a nicer, bigger, home -- and save money in the process. And who doesn't like that?
How Energy Efficient Mortgages Work
The typical American household spends more than $2,000 per year on home utility bills -- and that number can increase greatly if you live in a very hot or very cold climate. Plus, electricity costs in the U.S. have increased around 4% per year for the last decade, and they look to only keep increasing in the coming years. For example, while the average American's monthly electricity bill is currently around $110 per month, the U.S. Energy Information Administration (EIA) predicts that it will rise to around $180 per month in the next 20 years. That's a lot!
But, instead of complaining about high energy and utility prices, plenty of Americans are taking matters into their own hands. With an energy efficient mortgage, you can, too. An EEM can allow you to purchase a home that's already energy efficient, or to make energy-efficient improvements on a home you want to buy. Or, if you just want to make your current home a little more green, an EEM refinance can help you get the cash you need to increase your home's efficiency.
How to Qualify for An Energy Efficient Mortgage
In order to qualify for an EEM, a homeowner must first obtain a home energy assessment completed by a qualified energy assessor. As a part of the assessment, homeowners will receive the following:
- Recommendations on what kind of energy-efficient improvements may provide them the most savings
- An estimation of how much each potential improvement could save in energy costs
- An estimation of the costs of each home improvement
Mortgage lenders are unlikely to approve an energy efficient mortgage unless the home energy assessment determines that the homeowner's planned upgrades will be "cost-effective"; i.e., that they will save the homeowner more than their cost over a reasonable period of time.
What You CAN do With an Energy Efficient Mortgage
There are a variety of energy efficient home improvements that you can finance with an energy efficient mortgage, including:
Caulking and weatherstripping. Caulking may be the best way for homeowners to seal air leaks resulting from cracks and gaps in stationary parts of their home, while weatherstripping is ideal for filling the gaps inside movable building parts, like doors and windows.
Solar heating and cooling systems. These can help collect the sun's energy to reduce space heating costs, water heating costs, home cooling costs, and to heat your pool.
Clock thermostats. A clock, or programmable thermostat, is designed to adjust your home's temperature to a specific level, and can be programmed to set different temperatures at different times of the day. If you don't have one, you could be losing out on massive savings -- who wants to cool or heat an empty home?
Heat pumps. These come in several different varieties, including air source heat pumps and ground source heat pumps. Air source heat pumps extract heat from the air outside your home, which can be used to heat it, while ground source heat pumps extract geothermal heat from the ground for the same purpose.
Vapor barriers. These are important to help protect installation and heating and cooling elements from moisture and mold growth.
Furnace efficiency modifications. If your furnace is outdated, it might need a replacement or serious repairs to improve its energy efficiency. Today's furnaces are significantly more efficient than those that were manufactured only 10 - 15 years ago, so getting a new one could save you significant money each month.
Storm windows or doors. Installing exterior storm windows may be one of the best ways to increase your home's energy efficiency on a budget. Low-emissivity (low-e) storm windows can help reflect infrared heat back into your home, which can save you between 12%–33% on energy costs each year.
Water heater insulation. Insulating your water heater could be another way to help you reduce your water heating costs. In fact, according to energy.gov, insulating your water heater could "reduce standby heat losses by 25 – 45% and save you about 7 – 16% in water heating costs."
The FHA Energy Efficient Mortgage Program
If you have a mortgage insured by the Federal Housing Administration, you can still get an EEM under the FHA's Energy Efficient Mortgage program. Much like privately-insured energy efficient mortgages, an FHA EEM will require a home energy assessment conducted by a qualified energy assessor. FHA EEMs can help fund energy-efficient improvements like the ones mentioned above, and can also be used to finance both active and passive solar and wind technologies, like solar panels and residential wind turbines.
In fact, the FHA allows for larger mortgage sizes for borrowers that want to install a new wind or solar energy system when they buy or refinance their home. In addition, the FHA also allows homeowners to borrow up to $3,500 to pay for weatherization items like insulation and thermostats. For homeowners wishing to make renovations or improvements to their current home, the FHA EEM program can be combined with the Section 203(k) Rehabilitation Mortgage Insurance program.
The VA Energy Efficient Mortgage Program
Much like the FHA, the VA also offers energy efficient mortgages for qualified veterans, which allow them to get additional financing to make energy efficient improvements to their homes. Like conventional and FHA EEMs, VA energy-efficient mortgage applicants must also get a home energy assessment conducted by a qualified energy assessor.
VA EEMs permit qualified veterans to add $3,000 to their existing VA home loan in order to finance home improvements, with verification of the costs through bids or other documentation. For loan additions of $3000 to $6000, a lender must make sure that the improvements are cost efficient-- i.e., that they will create enough savings to justify the larger mortgage payments they'll create. In most cases, a VA energy efficient mortgage borrower has six months after closing to have their home improvements complete.
Speak with a Mortgage Specialist
If you want to purchase an energy efficient home or make energy efficient upgrades, get in touch with an experienced mortgage professional. A smart mortgage professional can help you find a great lender who's willing to work with you to help make your home more energy efficient -- saving you money and helping make the Earth a little greener at the same time.
From improving your insulation and replacing your water heater to installing solar panels or even a wind turbine, energy efficient mortgages can be a fantastic, flexible way to reduce your power bills.
And, if you want to learn more about energy efficient mortgages, or any other part of the home buying or home loan process, just fill out the form below and a friendly home.loans mortgage expert will get in touch!