Did you know that you can get a mortgage that helps you to be more energy efficient and reduce your environmental footprint? Most people are unaware of it, but the Federal Housing Administration (FHA) offers Energy Efficient Mortgages (EEM) that will allow you to finance the cost of energy efficient upgrades to your home. These loans are also offered through the Veteran’s Administration (VA) and are sometimes even offered by the lenders themselves. These programs allow homeowner’s to follow their green passion, and potentially save money in the process.
Here are just some of the upgrades that can be financed through an EEM:
- 1Replacing or upgrading a heating or air conditioning system
- Additional or new insulation for your home Installation of new doors or windows
- Weatherizing your home Solar technologies such as solar panels for electricity or passive solar technologies such as solar hot water heating
- Green roofing technologies, such as a living roof
It is important to note that an EEM is available for both new home purchases and refinancing. Often times a lender will separate an EEM from your main mortgage, but will combine the two when billing you. Unlike a second mortgage, with an EEM there is no additional lien on your property.
The first step to getting an EEM is to qualify for a traditional mortgage. Once you have qualified, the next step is to have an energy efficiency professional audit your home. They will issue a Home Energy Rating Systems (HERS) report which will rate your home on a scale of 1-100. The lower your score, the more energy efficient your home is. In addition, the report will contain recommended upgrades to your home, and a new score based on these upgrades. This report will help your loan officer to determine how much money you stand to save on your energy bills from these upgrades. You can finance the cost of the audit as part of the EEM.
It is important to make sure that you find a legitimate auditor so that you get the most out of your audit. A trustworthy auditor will be certified by Energy Star and will be able to walk you through the process of a home audit when you first talk to them so you know what to expect. Informing yourself of what a home audit consists of beforehand is another good idea. A great resource to energy audits is available on the energy.gov site here. Energy Star also has a list of partners here. Finally, if you are DYI type of person you can even audit your home yourself. A self-audit may not be accepted by all lenders, and it may save you time and a headache having a professional do it for you.
Download this free DIY home energy guide
From this point, you should reconnect with your lender in order to find out how large an EEM you qualify for. The maximum size of the loan varies depending upon your lending source, but it usually falls between 5-15% of the value of the home. Finally, speak with your auditor again to determine which upgrades will give you the best value within your budget.
If you are concerned with how the additional cost will affect your mortgage payments, a good strategy is to plug the numbers into a mortgage calculator. For example, after a loan officer looks over your financial information and the information from the HERS report, he determines that you can add another 7.5% of the total loan to your mortgage. If the home you are buying is valued at $235,000 you can multiply that by 7.5% to find out how much your loan will increase (i.e. $235,000 * .075 = $17,625).
For our purposes, I will assume you are applying for a 30 year fixed rate loan with a 20% ($47,000) down payment and the current mortgage rates are around 3.625% (rates vary on a daily basis and by location). You are now borrowing a loan of $188,000. According to our calculator, which accounts for expenses outside of the loan itself (insurance, taxes, etc.), you would pay around $1,232.38 a month for the original loan. Adding the $17,625 to the loan amount to get a total of $205,625 the EEM would cost $1,398.43 a month. These calculations do not account for any other related costs such as price of the audit or closing costs, and can be different based on your specific situation.
At first glance, this seems to work against you because it makes your payments higher. The major benefit to be aware of is the fact that EEMs actually have the potential to lower your overall housing costs per month. This is because the upgrades to your home should lower your energy costs every month. For example, someone switching from oil heating to a pellet or wood stove could potentially save you hundreds of dollars over the course of a winter. If you have air conditioning, new windows and insulation can help to keep the cool air in your house, decreasing how hard your air conditioner works, which in turn lowers your electric bill. In most cases, these savings will offset the increase in your mortgage bill. These savings will change based on your location and a number of other factors, so it is a good idea to discuss this with your home auditor in order to make an informed decision on which upgrades will be best for you.
EEMs can also be looked at as a long term investment, as once your house is paid off, you will continue to enjoy the savings from your upgrades.
Michael Ciocca is an author for the Total Mortgage Blog .
