The warm feeling that comes with helping the environment isn’t the only way to benefit from buying an energy-efficient home — you can actually save money, too.
That’s welcome news since the Federal Reserve recently announced its plan to unwind its policies to keep rates low, causing experts to predict mortgage rates to rise in 2022.
Increasing mortgage rates and soaring home prices cut into a homebuyer’s purchasing power, so finding other ways to save on monthly housing expenses can help. An energy-efficient home can reduce heating and cooling costs, lowering its operating costs and therefore making it more affordable. “A green home costs less to run than others, and lenders may count those savings as extra income,” said Tabitha Mazzara, director of operations at mortgage lender MBANC.
Energy efficient homes can create a more comfortable and safe place to live while potentially leading to increased resale value down the road, said Mazzara. According to a recent study from the American Council for an Energy-Efficient Economy (ACEEE), prospective homebuyers selected homes that had higher energy efficient scores 14% more frequently.
If you’re not sure you can afford to buy an energy efficient home or make green upgrades to your current home, you might qualify for a little extra help from an energy efficient mortgage. Here’s what you need to know about how these mortgages work — and how they can help you get a bigger bang for your energy buck.
What Is an Energy Efficient Mortgage (EEM)?
An energy efficient mortgage (EEM) is a federally-recognized financial tool designed to provide benefits to homebuyers who purchase or refinance a home that is deemed energy efficient or to finance the cost to make energy efficient home improvements.
Using an EEM, the lender will factor in the cost-savings that are expected as a result of lower utility bills and the potential increased resale value to the home. The borrower can benefit from more favorable financing terms such as a better qualifying debt-to-income (DTI) ratio and larger loan.
When going through the process of qualifying for an EEM, points out Doug Perry, strategic financing advisor with Real Estate Bees, a real estate marketing firm, you need to be prepared to take steps to prove that your home meets government standards for efficiency.
“These loans are well worth it for people that want a more energy efficient home and don’t immediately have the funds necessary to complete those upgrades, and are willing to go through the extra steps required to get an energy efficient mortgage,” Perry says.
In addition to providing you with increased comfort, according to the Department of Housing and Urban Development (HUD), an energy efficient mortgage could also potentially increase the resale value of your home. And if you get an EEM through the Federal Housing Administration (FHA) loan program, you could potentially exceed the loan limit for your area without making an additional down payment. These factors can make mortgages more accessible to those who might need help with a down payment or coming up with the funds to make energy efficient upgrades.
Who Is Eligible for an Energy Efficient Mortgage (EEM)?
All homeowners or buyers who qualify for a home loan can get an EEM, according to Mazzara. She says conventional lenders offer these loans, along with federal agencies like the Federal Housing Administration (FHA) and the Veterans Administration (VA).
As with any home loan, borrowers must meet eligibility criteria required by the lender. However, on top of meeting credit and income requirements, borrowers buying an energy efficient house with an EEM must also go through the process of certifying that the home in question meets certain standards.
“Energy efficient mortgages are for residential properties and are supported by programs from the government sponsored entities so they are widely available to typical homebuyers,” Perry says. “They are available at most traditional lenders and brokers. Borrowers can ask their local lender for information on the requirements for these loans.”
How to Find an Energy Efficient House
Looking for ratings for online home listings can be one way to determine if a home might qualify for an EEM, but Mazzara recommends checking for a green energy certification from a trusted third-party source.
A professional home energy assessment by a certified professional by the Building Performance Institute (BPI) or one that has been through the Department of Energy’s Home Energy Score Assessor training can verify that a home is certified energy efficient.
Buying or selling, you can use a real estate agent with experience in finding and selling energy efficient homes, says Mazzara. “Consider hiring an agent with energy efficient home experience or credentials such as the EcoBroker designation or the National Association of Realtors Green Designation.”
How to Apply for an Energy Efficient Mortgage
While an EEM can be a good choice, it does take a little extra work to get approved, mostly because the home must go through an evaluation, according to Perry.
“As part of the program, a qualified individual evaluates the home and potential upgrades, making recommendations on what upgrades can be cost effectively done,” he says.
When getting a home inspection, look for someone with credentials from the Department of Energy or the Building Performance Institute.
Mazzara says that the process is very similar to getting a conventional mortgage, in that you’ll go through the credit checks and income verification before being approved. She suggests the following checklist to increase your chances of getting an EEM:
- Have the home’s current value appraised
- Ask for a professional energy audit
- Compare the value of the home with its value after any energy efficient upgrades are made
- Check your credit report for any errors and have them fixed
- Ensure you meet the income requirements
- Compare lenders and make sure they take into account the cost of upgrades and your potential energy savings when offering a loan
Can You Use an Energy Efficient Mortgage (EEM) for Repairs on Your House?
It’s possible to use an EEM for repairs on your home, as long as you can show that your home’s energy efficiency will improve as a result of the upgrades you make.
“Depending on the type of EEM, you can borrow up to 15% of the home’s appraised value to make energy-efficiency improvements,” Mazzara says. “You can even use an EEM alongside another mortgage, such as a conventional loan or renovation loan.”
However, you can’t use an energy efficient mortgage for general repair, says Perry. It’s a good idea to double-check the dollar amounts and types of upgrades available before getting the mortgage.
According to the Office of Energy Efficiency and Renewable Energy, some of the energy efficient upgrades you could potentially make to your home include:
- Seal air leaks: These are areas where air can get in around doors, windows, floors, walls and other places. You can use weather stripping and caulk to seal the air leaks and make the home up to 30% more energy efficient per year.
- Seal ducts: By making sure all of your ducts are connected properly, you can reduce heat loss. Close gaps and insulate the ducts in your home for more efficiency in the way your heated or cooled air is delivered.
- Install programmable thermostats: It’s possible to save up to 10% on heating and cooling costs by using one of these thermostats to regulate your home’s temperature automatically during the hours you’re not at home.
- Insulation: You can use an EEM to help you add insulation to the walls, attic or crawl space. Insulation can help keep your home cooler in summer and warmer in winter.
- Hot water heater: Get a properly rated hot water heater to replace a less-efficient one.
- Install energy efficient windows: This is one of the most expensive upgrades you can make to your home. However, it can be a way to save money on heating and cooling by reducing heat loss by up to 50%.
Is an Energy Efficient Mortgage (EEM) Worth It?
In the end, an energy efficient mortgage can be worth it for homebuyers and even homeowners who want to make upgrades to their homes. Both Perry and Mazzara agree that the right approach can provide a way for you to increase the comfort of your home, as long as you’re prepared for a few extra steps in the homebuying process.
“Energy-efficient homes are better for the environment, more cost-effective for the homeowner, and have the potential to increase your home’s value,” Mazzara says. “It’s important to research as much as possible before making a decision, just like with traditional loans, but when used properly, EEMs can be a win-win for both homeowners and the planet.”