Green mortgages are an innovative product offered to United States homebuyers. As the name suggests, these mortgages are designed to make homes more environmentally friendly, and allows a homeowner to reduce their energy bills. A variety of home renovations will fall under the green mortgage category, and this loan can be attached to a robust amount of mortgage products, too. Let’s dive into what a green mortgage is.
What is a green mortgage
A green mortgage, also known as an Energy Efficient Mortgage, is offered to allow homeowners the ability to make their homes more energy efficient. This program is backed by both government and private lenders. This means you can secure an EEM from banks, credit unions as well as other lending companies. Additionally, if your purchase mortgage or refinance is through HUD or the VA, they will be insured by the government.
Green mortgages are not considered a second mortgage, or an individual loan. Rather, this program is rolled into your refinance or initial purchase mortgage and you’ll make monthly payments.
How EEM works
Regardless of whether you are purchasing a new home or renovating an older home, there is usually room for energy improvements in a house – this is natural. As age affects the quality of our home’s foundation, or as technology improves, efficiency will always be impacted.
There are common areas in a home which are culprits for over-utilizing energy. And, here are some usual improvements – under a green mortgage – that can help improve your energy consumption:
- Double paned windows
- Storm windows
- Clocked thermostats
- Tankless water heaters
- Modern HVAC systems
- New or additional insulation
- Calking and weather stripping
- Improving chimney
- Furnace efficiency
- Installing active and passive solar technologies
This list is not all-inclusive but should paint a fairly robust picture of the type of modifications, renovations or updates that can be improved by using the EEM program.
Can I save money with a green mortgage?
The goal of the upgrades is to you make your current home require fewer resources for heating and cooling your home. Naturally, this will lead to significantly lower utility costs. Consider these key factors:
- The EPA estimates homeowners can save about 15% on heating and cooling and 11% on total energy costs, by adding or updating insulation.
- The Energy Department estimates that homeowners can see a 25% reduction in air infiltration by improving sealants through a home – attic space, foundation and entryways as the main focus.
- Basic double-paned windows, which provide better insulation, can lower HVAC use and air infiltration by up to 24% in the winter and 18% in hot climates during the summer. About 42% of home energy costs are specific to this type of consumption.
- Adding a programmable thermostat can help you save on energy consumption. The degrees (in Fahrenheit) that you reduce your temperature by will equal the percent of energy you use. So, reduce your temperature by 2 degrees, save 2% on energy. With that said, finding a programmable thermostat will help you ensure savings in times that you’re not home, or when you’re asleep. This can save you hundreds of dollars on your electric bill, annually.
A more abstract way a green mortgage can save you money is if you are considering a home that is already equipped with some of these major updates. Lenders recognize that with homes that have energy efficient updates mean borrowers will have lower utility payments. Sometimes lenders will let you qualify for a greater overall mortgage amount, or loosen qualifying terms because of this extra monthly wiggle room.
For instance, an FHA loan usually comes with a debt to income qualifier of about 29%, if you pair an FHA loan with an EEM, you are able to increase the ratio to 33%.
The types of green mortgages available
As alluded to above, green mortgages are offered several different ways:
VA options
For a VA loan, there are different tiers of EEM approval. The first tier is financing for loans $0-$3,000. Naturally, this lower-bracket is the easiest to get qualified for. You also are required to show the smallest amount of paperwork (contractor bids, etc), to secure this size of loan.
For the next tier, $3,001-$6,000, the paperwork starts to become a bit more detailed. You’ll need to provide a year’s worth of utility costs for your home. You may also need to show how improvements made on your home, with EEM, will impact your energy bills. The point is to prove that the financing will make a significant difference in your energy consumption and bill. This level of financing tends to be the most common.
Above $6,000 in financing is difficult to obtain. You’ll need significant documentation and extensively detailed renovation plans to prove the money will be used wisely. It’s best to work hand-in-hand with both the lender and the VA to get this approved.
FHA options
According to the HUD, here are the specific restrictions for an EEM, the borrower can finance the lesser of two options:
- The total estimated cost of improvements to be made based on the HERS energy assessment.
or, the lesser of 5 percent of:
- the Adjusted Value;
- 115 percent of the median area price of a Single Family dwelling; or
- 150 percent of the national conforming mortgage limit.
Conventional options
Private EEM programs will vary by lender, so it’s best to learn about restrictions and qualifying terms on a per case situation.
How much can you finance through an EEM?
In most cases, there is no ceiling to a green mortgage – you can borrow as much as you are eligible for. (The VA EEM program caps borrowing – it is the only version of the EEM with limits.)
But, with increased home improvements come increased costs a borrower is liable for. You need to make sure the improvements you make will justify the costs you’re signing up for. Most loans have an EEM calculator that can help determine the amount of money a borrower can take out to finance energy improvements.
Always look to see if there is a government grant or special program that can help bear the brunt of these improvements.
Is everyone qualified for a green mortgage?
Most often, yes. If you have already been qualified for a loan, then it’s likely you also qualify for an EEM.
When is it most beneficial to acquire a green mortgage?
This will vary from home to home. Every house will have room for improvement in different areas. Still, it’s important to assess what upgrades will impact your energy consumption the most. Just because you think you’d like to get a new HVAC, doesn’t necessarily mean it’s the best use of a green mortgage.
To find out which improvement will be the best bang for your buck, consider a HERS assessment.
You can find what appliance or portion of your home needs updating through a HERS.
The Residential Energy Services Network offers information about the HERS index, or the Home Energy Rating System.
This index was created for homeowners to assign a numeric value to a home energy performance. To get a HERS rating you or your lender will need to get in touch with a certified RESNET HERS rater.
You can find the National Registry for certified RESNET HERS Raters and Home Energy Ratings, here.
What does a rater look at?
According to the RESNET website, here are a few specific home features they consider when determining a HERS score.
- Ceilings and roofs
- Insulation
- Attics, foundations and crawl space
- Local climate
- Attics, foundations and crawl spaces
- HVAC systems
- Thermostats
What does the HERS scoring system look like?
When it comes to a HERS score, homeowners want to shoot for a low number, this indicates an energy efficient home. This also indicates lower energy bills.
The score out of 130 on the HERS Index. A home with a score of 70 is 30% more energy efficient than a standard new home, conversely, a score of 130 means a home is 30% less energy efficient.
A new home is ranked at a 100, as a baseline.
After you have gotten a HERS assessment, you can start pinpointing exactly what part of your home is the least energy efficient – an answer to where to start with your renovations.
Geography also plays a part
Geography shows that the northern area of the United States can benefit most from these energy efficient improvements.
Northern U.S. sprawling from Washington, along the Canadian border, as far as Maine have shown 18% savings in heating and cooling with energy-efficient upgrades. The areas experience drastic temperature changes each year from cool to warm.
In certain boroughs of Alaska, residents see a total decrease of energy use around 15%.
The national average is 15% for heating and cooling costs, and 11% for the total house. In some climate zones, upgrades are still meaningful, but show a much smaller percentage of change, as low as 5% for total house improvements in Hawaii, Guam and Puerto Rico.
Continued reading resources:
If you’re unsure where to start, there are some great resources for further reading. Here are a few to consider:
- Home Energy Saver
- Residential Energy Services Network
- HUD Energy Efficient Mortgage Program
- VA EEM loan presentation
If you think you’re ready to secure an EEM, you can connect with a mortgage lender today.