Going GREEN with your Mortgage

Energy Efficient Mortgages

Green mortgages, or energy efficient mortgages, allow homeowners to use their commitment to the environment to leverage bigger loans. The green mortgage was born in 1979 when President Jimmy Carter signed an executive order directing federally sponsored secondary market institutions to offer consumers incentives for energy-efficient homes. The concept is based on the premise that a more energy efficient home will have lower utility bills. That savings can be considered income, allowing a homebuyer to qualify for a bigger loan.

The Energy Efficient Mortgage Loan program helps current or potential homeowners significantly lower their monthly utility bills by enabling them to incorporate the cost of adding energy efficient improvements into their new home or existing housing. This program eliminates the need for homeowners who are interested in making their home more energy efficient to take out an additional mortgage loan to cover the cost of the improvements they intend to make to their property. The program is available as part of an insured home purchase or by refinancing your current mortgage loan.

ELIGIBLE ENERGY EFFICIENT ACTIVITIES
Energy Efficient Mortgages can be used to make energy-efficient improvements in one- or two-unit existing and new homes. The improvements can be included in a borrower's mortgage only if their total cost is less than the total dollar value of the energy that will be saved during their useful life. The cost of the improvements that may be eligible for financing as part of the mortgage is either 5 percent of the property's value (not to exceed $8,000) or $4,000, whichever is greater.

To apply for one, you'll need to provide a Home Energy Rating System report. HERS reports indicate that your house meets all energy efficiency guidelines. Homeowners looking to upgrade their home's energy efficiency can commission a trained Energy Rater to issue a HERS report suggesting efficiency improvements, and estimate the cost of those improvements, as well as the savings. (The cost is usually a few hundred dollars.) A builder can provide proof for a new home.

A HERS Report includes:

Overall Rating Score of the house as it is.
Recommended cost-effective energy upgrades.
Estimates of the cost, annual savings, and useful life of upgrades.
Improved Rating Score after the installation of recommended upgrades.
Estimated annual total energy cost for the existing home before and after upgrades.

Rating scores are between 1 and 100. Higher scores indicate greater efficiency. Cost-effective upgrades are those which will save more money through energy savings than they cost to install.

U.S. Department of Energy recommended Home Energy Ratings contain a numerical score from 1 to 100, a one to five star-plus rating, and the estimated energy costs. Higher scores indicate greater efficiency. Cost-effective upgrades are those which will save more money through energy savings than they cost to install.

A HERS rating usually costs between $100 and $300. This could be paid for by the buyer, seller, lender, or real estate agent. Sometimes the cost of the rating may be financed as part of the mortgage. No matter how the rating is paid for, it is a very good investment because an EEM could save you or your buyer hundreds of dollars each year.

THIS IS WHY THE EEM WORKS

Energy-efficient homes cost less to own than non-efficient homes, though they may start off with higher price tags.

Older existing home Same Home with energy improvements Home price (90% mortgage, 8% interest) $150,000 $154,816 Loan amount $ 135,000 $139,334 Monthly payment* $991 $1023 Energy bills +$ 186 +$ 93 The true monthly cost of home ownership $ 1,177 $ 1,116 Monthly savings - $ 61

* Estimated mortgage payments are based upon principle and interest only, and do not include taxes and insurance. Value indicated here are for example only, and will vary from home to home.

Many homes qualify for energy upgrades.

This home qualified for $4,816 in upgrades. With the EEM, lenders recognize the savings the upgrades will bring. Borrowers may use these potential savings like extra cash, and add the cost of upgrades into the mortgage, paying them off easily as part of the monthly mortgage payment. Once the upgrades are installed the potential savings turn into real savings.

The other EEM option is for the lender to stretch debt-to-income qualifying ratios to allow a larger loan for a house that is already energy efficient. A debt-to-income ratio "stretch" means that a larger percentage of the borrower's monthly income can be applied to the monthly mortgage payment. That means the buyer has more borrowing power based up on the same income.