One of the best tools for making your dream home more affordable while saving on the cost of power, heating and cooling is the energy-efficient, or "green," mortgage.
Most energy-efficient mortgage, or EEM, programs let you qualify for bigger loans than you would otherwise by folding in the additional cost of making improvements for energy efficiency or of purchasing an already energy-efficient home. Another version of the green mortgage provides discounts on loan fees or interest rates for homes that are certified as energy-efficient.
Because mortgage interest payments are tax-deductible, an energy-efficient mortgage can be a more cost-effective way to finance home-energy improvements than using a credit card, bank loan or cash, which usually offer no tax benefits.
The Federal Housing Administration, Fannie Mae and the U.S. Department of Veteran Affairs each have some version of a green mortgage. Freddie Mac, while having no formal energy-efficient mortgage program, allows lenders to take the projected utility savings from home upgrades into account when setting the loan amount.
Energy Star Mortgage a deal for buyers
In February 2009, the Energy Programs Consortium, a nonprofit policy research group in Washington, D.C., launched its new Energy Star Mortgage in Maine as a joint effort with the state housing agency there.
The consortium was formed 10 years ago by a handful of state and federal energy and regulatory agencies to coordinate energy policy and programs. Last month, it adopted the "Energy Star" label, which refers to a system adopted by the U.S. Environmental Protection Agency and Department of Energy for applying an energy-efficiency rating to appliances, equipment and new homes.
The consortium's Energy Star Mortgage program targets families who are buying new homes or refinancing existing ones to encourage them to make the structures more energy efficient and, therefore, more affordable, says Mark Wolfe, the group's executive director.
It is designed to help homeowners save a minimum of 20% on energy costs. And like most other green-mortgage programs, the Energy Star Mortgage incorporates the cost of energy-saving improvements into the loan. This type of mortgage also takes into account any existing state weatherization or energy-efficiency benefit, Wolfe says.
As for participating banks, they must either offer a mortgage discount or pay part of the closing costs to have the right to offer a mortgage under the branded label of Energy Star Mortgages.
"For the lender, it's a marketing opportunity because more homeowners are interested in these kinds of mortgages," Wolfe says. "It's a marketing incentive. It's like a free toaster."
States, banks and other agencies have green mortgages
Several states, including Kansas, New York and Pennsylvania, already fund their own green-mortgage programs, and a few private lenders, such as Citibank and Bank of America, offer their own energy-efficient conventional mortgages apart from those that are federally insured.
The FHA program allows homeowners to finance energy-efficiency improvements by adding up to 5% of the property value, up to $4,000, to the green mortgage. The limit may increase if the loan is used for weatherization improvements or to pay for solar photovoltaic panels or solar water-heater installation.
Fannie Mae will allow homebuyers to bump their debt-to-income ratio — one factor in determining a mortgage's size — by 2%, as the larger mortgage payment would be balanced by the monthly utility savings from green improvements.
In the case of a new, already energy-efficient home, homebuyers can increase the mortgage amount by an additional 5% of the home’s value.
Through the VA's energy-efficient mortgage program, qualified military personnel, reservists and veterans are allowed to finance up to $3,000 in upgrades based solely on their documented costs and up to $6,000 if the improvements are projected to produce more savings than the cost of those upgrades.
