Homeowners have always been concerned to some extent about how energy efficient their home is. A high ceiling in the living room might look majestic, for example, but a seasoned buyer might recognize the additional costs they will face in the heat of summer and cold of winter conditioning the larger space. As environmental awareness has taken hold of the country, the Federal Housing Administration has become equally interested in the energy efficiency of homes -- and whether or not the government’s goal of decreased nationwide energy consumption is a personal passion, the decreased costs and increased comfort that come with a better equipped and insulated home are of interest to everyone.
To that end, the FHA introduced their Energy Efficient Mortgage (EEM) program, colloquially known as green mortgages
. These are special additions to a normal mortgage (EEMs can also be taken out independently of a primary mortgage) that are specifically marked to pay for improvements to a home that increase its overall energy efficiency. There are three main types of EEM depending on your situation:
• Conventional EEM:
If your lender sells their loans to Fannie Mae and Freddie Mac, it is covered by a conventional EEM. This type allows for up to 15% of the home’s value to be borrowed for the purposes of making improvements.
• FHA EEM:
This type of loan is limited to only 5% or of the home’s value for the purposes of making improvements, up to an $8000 maximum with a $4000 floor. While the amount that can be borrowed is not as large, FHA financing has its own benefits that are tied into the green mortgage as well.
• VA EEM:
a green mortgage from the Veteran’s Association is appropriately limited to present and past members of the military. Up to $6000 can be borrowed for improvement irrespective of the value of the home being improved. Who offers EEMs?
Each state has a large number of lenders that offer energy efficient mortgages. The Energy Star website has a Partner Locator
that enables borrowers to find lenders who are operating in their home state.
Lenders may offer anywhere from just one to all three types of EEMs, so be sure to discuss which is most appropriate for your situation and your home improvement goals. Remember that EEMs are not a grant, so while the energy efficiency improvements made are specifically chosen to pay for themselves over their respective lifetimes, a green mortgage must still be repaid like any other loan.Who is eligible for an EEM?
If a borrower is able to take out a conventional mortgage, he or she is more than likely also able to take out an EEM. The main draw of getting an EEM instead of taking out another loan for the same improvements is that it is rolled into the regular mortgage payments, and the interest continues to be deductible at the end of the year, making them both cost less and more convenient than other mortgage loans
whaThe only special criteria for having a green mortgage absorbed into the main mortgage is that the improvements made be cost efficient, meaning the energy savings over the life of the improvement are greater than the cost of the improvement. For example, if better insulated windows cost $800 to install, they have to rated to save $800 in heating and cooling costs over the expected life of the windows.What improvements does a green mortgage pay for?
When applying for an energy efficient mortgage, a specialist will visit your home to assess its current energy efficiency and make suggestions for what improvements should be made. These improvements are ranked in terms of overall efficiency – energy saved per unit cost. The cost of the inspection is usually a few hundred dollars and is handled differently depending on the lender: some will pay for it themselves, some borrowers must pay out of pocket, and sometimes the cost of the inspection is rolled into the EEM itself.
Some weeks after the inspection, the recommendations come back in the form of a HERS report. The Home Energy Rating System report considers all aspects of home insulation and efficiency, including windows, wall and attic insulation, air conditioner and heating units, ventilation, and the local climate. The recommendations made in the report includes all the information needed to make decisions about which improvements to make, including price estimates, savings estimates, and lifespan of improvements.
Once the HERS report is received, the lender and borrower work together to find out how much the borrower is qualified to receive and decide which improvements will be pursued.