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An Introduction to Energy Efficient Mortgages

Posted by  on Apr 16, 2009
 
Energy efficient mortgages were introduced in America in the 1990s, for two purposes. Building an energy efficient home or remodeling a home with the purpose of increasing its energy efficiency helps to reduce energy use and pollution, and help achieve national energy-efficiency goals. The second reason is that choosing an energy-efficient mortgage helps to provide housing for people who may not otherwise be able to afford a mortgage, and allows a home buyer to obtain a larger mortgage than they might otherwise be able to afford. Owners of energy efficient homes also benefit from lower utility bills, and a higher potential resale value on their home.

Energy Efficient Mortgages for Building or Buying a New Home

In general, energy efficient homes are more expensive than those without energy-saving modifications. However, by using an energy efficient mortgage to purchase a home, you can stretch out your mortgage dollars a little further than you could otherwise. Even though you may be paying higher monthly mortgage payments, the extra expense is offset by the savings you make each month on your utility bills.

Alternatively, you can use an energy efficient mortgage to buy a home that is not energy efficient, if you agree to improve the home’s energy efficiency after you move in. In this case, the money that you will use to pay for remodeling is held in escrow until remodeling starts. When you use an energy efficient mortgage in this way, the improvements you make must cost less than the total amount of money you will save in utility bills over the life of the energy efficient systems you add to the home. Depending on the organization that backs the mortgage, between five and fifteen percent of the value of the home can be financed for energy efficient improvements.

Note that using an energy efficient mortgage to finance home improvements also requires that any improvements are completed within a certain time frame. In most cases, this is between 90 and 180 days after the loan is approved. This does not usually create any problems, providing you have already chosen a contractor before the loan is approved.

Energy Efficient Mortgages for Remodeling

Remodeling is typically an expensive process, particularly when remodeling is planned with a focus on energy efficiency. The primary benefit to the home owner lies in reduced utility bills, but the costs of remodeling in this way are high. If you plan to remodel your home, obtaining an energy efficient mortgage to finance the remodeling is a good way of reducing the costs.

To qualify for an energy efficient mortgage for remodeling purposes, your planned improvements must increase the energy efficiency of your home such that the amount of money you save on your monthly utility bills is higher than the monthly mortgage payment. This means that in effect, you are using the money you save on utility bills to pay for the improvements, so overall the mortgage does not increase your monthly expenses. The only other eligibility criteria for obtaining an energy efficient mortgage for remodeling is that you must apply for the funding before the work has started on your home, and before any other financing has been arranged. In addition, the same time constraints apply for remodeling an existing home as for remodeling a home you are purchasing”you have between 90 and 180 days to complete the improvements once the loan is approved.

Getting an Energy Efficient Mortgage

The energy efficient mortgage is one of a number of mortgage products insured by the Federal Housing Association. The FHA backs such mortgages to encourage lenders to approve mortgages for people who might not otherwise qualify for a conventional home loan. Energy efficient mortgages are also offered by the Veteran’s Administration as well as lending programs such as Fannie Mae.

The first step in obtaining an energy efficient mortgage is simply finding a lender who offers them. This is typically a simple process, as the FHA and Fannie Mae both offer searchable databases you can use to find lenders in your area.

Overall, the process of obtaining an energy efficient mortgage is very similar to any other type of mortgage, but some additional documentation is required. Regardless of whether you are buying a home that is already energy efficient or making improvements to the home to increase its energy efficiency, the home will need to be inspected by a Home Energy Rater. They’ll inspect the property to determine its level of energy efficiency, and also estimate the home’s current energy costs. The Home Energy Rater’s report is used to determine whether the property qualifies for an energy efficient mortgage in its current state, or to pinpoint areas in which energy efficient improvements can be made that will enable the home to qualify.

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