Green Loans and Energy Efficient Mortgages Can Help You Finance Home Upgrades. Here’s What Borrowers Need to Know

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Tax credits for residential energy efficiency expired at the end of 2021, but there are still cost-saving reasons to make green home improvements — and ways to finance them, too.

“You can save money and the environment at the same time by installing energy and water saving features in your home,” says Tabitha Mazzara, director of operations at mortgage lender MBANC. “Business owners and homeowners are turning to financing options like green loans or energy efficient mortgages so they can make eco-friendly and energy-saving improvements while saving money on their utility bills every month.”

If you want to make green upgrades to your home and don’t have the cash, you might be able to get an energy efficient mortgage (EEM) or a green loan to help you fund energy efficient improvements. 

Here’s what you need to know about these two different financing tools, the similarities and differences, and how to get them.

Green Loan vs. Energy Efficient Mortgage: Main Differences

The terms “green loan” and “EEM” are often used interchangeably, according to Jacob Channel, senior economic analyst at LendingTree. The term “green loan” is a way for lenders — including auto loan lenders and mortgage lenders — to simplify the umbrella category of green savings, he says.  

However, it’s important to know the distinctions: 

Green Loans

A green loan is a type of personal loan, which can be unsecured in some cases (meaning you don’t need collateral). “Green loans are usually most used for one-time, climate-friendly home improvement projects like weatherization, solar panel installation, or even a kitchen renovation that uses sustainable materials and appliances,” says Mazzara. 

Energy Efficient Mortgage

“An energy-efficient mortgage is a home loan that’s used to buy an existing home that meets energy-efficiency standards or to improve a home you already own.” Like a regular mortgage, an EEM is secured by your home. If you can’t make payments on the mortgage, you could potentially lose the house. 

Green Loans and Energy Efficient Mortgages (EEM) Vs. Traditional Loans: Pros and Cons 

One of the biggest pros of both green loans and EEMs is that you can reduce your negative impact on the environment and live more sustainably. On top of that, both of these loans have the potential to help you reap utility savings that can offset the cost of the loan over time and eventually save you money.

With both green loans and EEMs, it’s possible to access more upfront cash than a traditional mortgage. Additionally, some lenders offer lower interest rates, and you could end up paying less than if you got a home equity line of credit, says Channel. 

On the other hand, green loans and EEMs can take longer to get approved, and there are often more requirements and hoops to jump through. “Unless you have a home energy assessment done, it can be difficult to know where your green loan dollars will have the most impact,” Mazzara says. 

“There are also limits to what appliances and projects are considered energy-efficient and to how much you can borrow for energy efficiency.”

With an energy efficient mortgage, both Channel and Mazzara warn, you might get approved for a higher mortgage amount, but that also means a higher monthly payment and more interest over the life of the loan.

“If the money that you would save in utility costs isn’t very high or the renovations that you’d need to make aren’t very big and are something that you could afford with cash, then a green loan or energy efficient mortgage might not be worth it,” Channel says.

Here’s a breakdown on the advantages and drawbacks of green loans and EEMs compared to traditional borrowing:

Pros

  • Potential to lower utility costs

  • Potential to lower overall operating costs of owning a home

  • Reducing impact on the environment

  • Access to more upfront cash compared to traditional mortgage

  • Some lenders offer lower interest rates on green loans

  • Potentially better terms than a HELOC

Cons

  • Approval process takes longer

  • More requirements and hoops to jump through

  • Need home energy assessment

  • Limits to types of home projects and upgrades deemed energy-efficient

  • Borrowing limits

  • Bigger loan means higher monthly payments

  • Additional borrowing equals more total interest paid

How to Get a Green Loan or Energy Efficient Mortgage (EEM)

Because green loans are often used for one-time home improvements, they are similar to applying for a personal loan. Lenders will check your credit and consider your income. You might need to specify which green home improvements you plan to make, and you could be required to show additional documentation proving your purchases qualify as “green.”

Meanwhile, energy efficient mortgages, like regular home loans, take more time and effort to secure. 

“The process for applying for an EEM is a lot like the process of applying for a regular mortgage,” Channel says. “Unlike a traditional mortgage, however, green loans usually include what’s called an energy assessment where a lender looks at your home and determines what kind of energy saving renovations you could make and how much money that those renovations could save you.”

You also might need to have an inspection when you complete any upgrades to verify that you meet energy-saving requirements. 

When getting any type of loan, including a green loan or EEM, Mazzara recommends taking the following steps:

  • Review your credit to make sure your information is accurate.
  • Find out from your lender what inspections and requirements you need to qualify for a green loan or an EEM.
  • Have a home energy assessment performed by a qualified professional so you know what to expect.
  • Compare different lenders to ensure you’re getting the best terms.

Pro Tip

Meet with a free housing counselor sponsored by the U.S. Department of Housing and Urban Development (HUD) to review your finances and home affordability.

Are Green Loans or Energy Efficient Mortgages (EEM) Worth It?

Both green loans and EEMs can be worth the cost if you want to make energy efficient upgrades to your home and you don’t have the ready cash to pay for the upgrades. Additionally, getting a loan might be worth it if you don’t want to dip into your savings. 

An unsecured green loan designed for home improvements such as solar panels, energy efficient windows, or energy efficient appliance purchases might make sense if you don’t want to get a home equity loan or home equity line of credit (HELOC) and secure the financing for your upgrades against your home as collateral. 

For those making more substantial upgrades or buying a home, an energy efficient mortgage can help since it allows you to get the home you want without an additional loan or by dipping into savings. Plus, the savings from the energy efficiency can be included in your income calculations, making it easier to get approved for the home loan.

“Just like with traditional loans, be mindful of all pros and cons before making a decision,” Mazzara says. It’s tough to decide between things like a longer approval process or a larger loan and if they are worth the benefits of lower utility bills and a more environmentally friendly house. 

You can get free or low-cost professional advice about these options and your personal situation by contacting a housing counselor who is certified by the U.S. Department of Housing and Urban Development (HUD). You can find a local counselor through HUD’s website here.