EE Mortgages

UNITS / TERMS:

 Energy-Efficient Mortgage (EEM) - When a homeowner or homebuyer applies for a home loan, at the time of purchase or refinance, he or she can roll the cost of needed energy improvements into the mortgage, amortizing the cost of the improvements over the life of the mortgage, based on the expected savings. This structure is especially attractive because there is no compromise in the loan-to-value (LTV) ratio for the borrower. There are now a range of green financing options, and the EEM represents an attractive option in specific circumstances.

Clearinghouse: Financing an Energy-Efficient Home

Energy Efficient Mortgage Home Owner Guide

 

 

BACKGROUND FACTS:

 The average homeowner in the U.S. spends $1,900 a year on utility bills. (http://yosemite.epa.gov/opa/admpress.nsf). This may seem low, but it's the average. Each individual household's annual costs depend, of course, on number of occupants, climate, cost of utility services in the service territory, and other factors. An energy-efficient home with proper insulation, high efficiency heating and cooling systems, and energy-efficient windows can save as much as 10-50% on utility bills. Since a home with energy-efficient features is more cost-effective, there are programs available that provide homebuyers with more options for financing for efficient homes.
 

 People can benefit from green financing options whether they are buying, selling, refinancing or remodeling a home. The range of green financing options gives residential and commercial buyers and sellers a wide range of choices to meet an even wider set of circumstances.
 

 Some green financing programs require an inspection from a professional who is certified under a state or nationally accredited Home Energy Rating System (HERS). For example, to qualify for a Fannie Mae energy-efficient mortgage product, the energy report typically must show that the new home is already energy-efficient or that the recommended improvements for an existing property are cost-effective and will save money. Depending on the specific circumstances, a borrower using an energy-efficient mortgage may qualify for a better rate and/or extra money for energy improvements.
 

 Energy raters test and score homes based on efficiency and other green design features. The rater produces a rating report outlining the recommended steps and approximate costs for increasing the overall efficiency of a home, as well as estimated monthly energy bill savings. Energy raters can be found through online directories. The rater is a fundamental ingredient in the process of establishing a baseline from which to measure a property's current energy performance and the potential for improvement.
 

Some of the labels one can expect to see when exploring energy-efficient financing options include: 

• • Energy Star Mortgage

  • FHA

  • Fannie Mae

  • Freddie Mac

  • Edison Electric's E Seal program

 

 The energy-efficient mortgage structure for a borrower from Fannie Mae can reach up to 15% of the total loan value. The EEM allows the borrower to add the cost of energy efficiency improvements to the principal of the loan at no compromise in the LTV (loan-to-value ratio). Simply put, a homeowner can finance 100% of the improvements without increasing his/her down payment.
 

 FHA's energy-efficient mortgage structure has been the most widely used EEM over the last 25 years. This loan allows homeowners to borrow up to 5% of the total loan value in cost-effective energy efficiency improvements, not to exceed $8,000 and no less than $4,000.
 

 Freddie Mac and E Seal also offer energy-efficient mortgages, with slightly different criteria.
 

 Borrowers may qualify for an Energy Star Mortgage if the home they are financing is 30% more energy-efficient than guidelines established by the Model Energy Code (an Energy Star Certified home). An Energy Star Mortgage offers a minimum 2% stretch on the borrower's debt to income ratio plus at least one of the following incentives:

• • Lower interest rate

  • Discount on closing costs and/or origination fees

  • Paying for the cost of the home energy rating

 

 The wide range of financing options available for homeowners and building owners includes utility financing in some service territories. In some instances, the local utility provides zero-percent financing for energy efficiency. In other areas, banks, nonprofits, and other organizations offer alternatives for financing energy efficiency and renewable energy technologies.

 

CASE STUDY:  Energy-Efficient Mortgages

First-time home buyers purchased their home in California. It was built in 1940, and sold for $150,000. They got an FHA loan for 95% of the value of the property. The lender saw an opportunity for them to improve on their investment and recommended an energy-efficient mortgage.

A HERS Rating on the home recommended $2,300 in energy improvements including ceiling, floor and furnace duct insulation, plus a setback thermostat. The lender set aside an extra $2,300 for the improvements, bringing the total loan amount from $142,500 to $144,800. The loan closed, the home buyers moved in, and the improvements were installed. The monthly mortgage payment increased by $17, but they are saving $45 each month through lower utility bills.

(This case study is from the Energy Efficient Mortgage Home Owner Guide, available from the Consumer Information Center, Pueblo, Colorado).

 

 

 

 

 

FAQ

 

What are the advantages of EEMs?

EEMs offer several advantages over conventional mortgages. First, EEMs can be used to qualify you for homes which would otherwise be out of your price range. Since the home will have relatively lower energy bills, you will have money available for a bigger kitchen, additional bathroom or even a larger home. Another advantage is that a home purchased with an EEM virtually guarantees the home is relatively energy efficient, thus saving you money on utility bills, which are the second largest expense of home ownership after the mortgage. Finally, and perhaps most importantly, a home purchased with an EEM will provide you with a comfortable living environment year round - remaining cool in the hot summer months, and retaining warmth on cold winter days.

 

What makes a home energy efficient?

Energy efficiency is rated on the ability of the home to operate efficiently with the lowest possible energy costs. Common sources of energy loss include air leakage, poor insulation, inefficient heating and air conditioning units, and high energy-using appliances.

 

How are homes rated for energy efficiency?

The Home Energy Rating System (HERS) is a national system designed to allow homeowners, real estate agents, lenders and builders a way to easily evaluate the energy efficiency of new and existing homes. The system is currently being used in 15 states with many more considering it as part of a state or utility program. HERS ratings range from 1 star, which is very inefficient, to 5 + stars, which is extremely efficient. In nearly all cases, homes which receive a rating of 4 stars or higher are eligible for EEMs. Such a rating ensures your home will operate at a high level of efficiency and thus save you money on your utility bills.

 

What goes into a rating?

The rating will consider the following: attic, wall, and floor insulation levels; types of windows and doors and their thermal performance; heating and air conditioning efficiency; water heating; and lighting. Most importantly, all ratings use a blower door test to determine air leakage or infiltration occurring in the home. Some ratings will also include air duct testing of the central heating and air conditioning ducts.

Once completed, ratings are processed and mailed to you. The rating information will explain how efficient your home is and what can be done to increase its efficiency. Depending on the cost effectiveness of the recommended improvements, you may or may not wish to have them installed.

 

What if the home I’m buying isn’t a new home?

If you are purchasing an existing home or refinancing your current home, consider an Energy Improvement Mortgage (EIM). EIMs are very similar to EEMs in nearly all aspects.

To be eligible, you will need to identify potential energy saving improvements to the home. In most cases, this will require an energy rating. The improvements being made must increase the HERS rating by at least 10 points (on a 100 point scale).

 

How do I get an EEM or EIM?

If you are interested in an EEM or an EIM, talk to your lender. Some homes have already been rated for energy efficiency, but if the home you are interested in buying has not been previously rated, check with your local utility to arrange an energy rating. The fee for this service is approximately $250 and is often paid for by the local utility. In addition to traditional bank mortgages, Fannie Mae, Rural Development (formerly RECD), and the U.S. Department of Housing and Urban Development (HUD) all have programs which recognize EEMs and EIMs.

 

How long after the rating do I have to complete the improvements?

After you and your lender decide on which improvements to make, your lender will place the improvement funds in an escrow account until all work is completed. You will have approximately 120 days from the date of closing to complete the specified improvements and submit the bill to your lender for payment.

 

Is there a limit on how much can I spend on the improvements?

Generally speaking, the improvements must be cost-effective, and require approval of the lender. In most cases, the amount to be borrowed cannot exceed 2% of the value of the original mortgage. There are cases when the lender will stretch this value even higher, but you need to speak with your lender directly to see if you qualify.