What Is an Energy-Efficient Mortgage?
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Table of Contents
- How to use an energy-efficient mortgage
- Energy-efficient mortgage requirements
- Can an energy-efficient mortgage save me money?
- Types of energy-efficient mortgages
- What projects are allowed with an energy-efficient mortgage?
- Pros and cons of energy-efficient mortgages
- Alternatives to energy-efficient mortgages
An energy-efficient mortgage, or EEM, helps people buy homes with energy-saving upgrades or renovate homes to make them more energy-efficient. EEMs are available as home purchase or refinance loans. They're not a common type of mortgage, but shoppers still have various options, including conventional and government-backed loans.
Here's how to decide if an energy-efficient mortgage is right for you.
How to use an energy-efficient mortgage
You can use an EEM to:
Buy or refinance a home with existing energy-efficient features (such as an Energy Star-certified home).
Buy a home, then renovate it with energy-saving upgrades.
Finance the cost of energy-efficient improvements to your existing home.
Pay off debt related to energy-efficient home improvements, such as a Property Assisted Clean Energy, or PACE, loan.
If you're renovating, a qualified home energy rater or assessor must recommend specific energy-efficient upgrades, which your mortgage lender must then review. The total cost must remain under a specific dollar amount, which varies by loan type.
The Inflation Reduction Act of 2022 provides new tax credits and rebates for energy-efficient home upgrades. Before starting a home renovation project, consult with a tax professional to understand the savings available to you.
Energy-efficient mortgage requirements
Like other mortgages, you first must meet underwriting conditions (such as a minimum credit score and debt-to-income ratio) required by the lender.
Beyond that, an EEM has some unique requirements. To qualify for an EEM, the home must typically undergo a home energy assessment. Newly constructed homes are often rated using a Home Energy Rating System, or HERS. Older homes are typically rated using the U.S. Department of Energy Home Energy Score.
If you're planning renovations, some lenders will waive the energy assessment requirement if the cost of the upgrades falls below a certain dollar amount.
Energy assessment and rating
In this assessment, a certified professional energy rater conducts a room-by-room evaluation of your home. They also look closely at past utility bills. To determine the home's current energy efficiency, they consider factors such as:
Air leakage and drafts.
Level of insulation.
Efficiency of heating, ventilation and cooling systems.
Efficiency of appliances, lighting and thermostats.
After the assessment, the home receives an energy rating from 0 to 150. A lower score indicates higher energy efficiency. If the home is already energy efficient, it could qualify for an EEM as is. The inspector will recommend which energy-saving improvements — such as new windows or solar panels — would provide the most annual savings relative to their installation cost.
An energy assessment often costs $300-$600, depending on where you live and the size of your home. With an EEM, the assessment cost can be rolled into your mortgage.
Project approval (for renovations)
The mortgage lender reviews the energy assessment and proposed upgrades. Then they approve a list of cost-effective projects. The upgrades can be financed as part of your mortgage or with money from a cash-out refinance.
Can an energy-efficient mortgage save me money?
Yes. Energy-efficient mortgages tend to have better rates than other fixed-rate mortgages — and energy-efficient homes tend to have lower utility bills.
If you're making renovations, and the cost is rolled into your mortgage, you'll likely have a higher monthly mortgage payment. But saving money is still possible when you factor in lower utility bills.
Types of energy-efficient mortgages
EEMs are available as home purchase loans or refinance loans. A refinance can help homeowners pay off debt related to home energy efficiency, such as a PACE loan, or tap into home equity to make energy-efficient home improvements.
Options include conventional mortgages and government-backed loans insured by the Federal Housing Administration and the U.S. Department of Veterans Affairs.
If you meet income requirements, your home upgrades might qualify for funding through the U.S. Department of Energy's Weatherization Assistance Program. In addition, some states offer energy-efficient mortgage programs. Find your state's energy office to learn more.
Conventional energy-efficient mortgages
The two main options are:
GreenCHOICE Mortgage, guaranteed by Freddie Mac.
HomeStyle Energy mortgage, guaranteed by Fannie Mae.
Both of these have purchase and refinance options.
GreenCHOICE and HomeStyle Energy mortgages provide similar benefits but differ slightly. Notably: With a GreenCHOICE loan, you don't need an energy report if the cost of your upgrades is less than $6,500. For HomeStyle Energy mortgages, the cutoff is $3,500.
How much can I finance?
Each of these conventional loans allows borrowers to finance energy-efficient upgrades costing up to 15% of the home's "as complete" appraised value, the value of the property when all recommended improvements are made. For example: If your home's "as complete" value is $350,000, you could finance $52,500 in energy-efficient upgrades.
VA energy-efficient mortgages
These loans are available to veterans, service members and their eligible spouses.
Other than eligibility, one thing differentiates these from conventional loans: A VA EEM is an add-on that must be used alongside a VA home purchase loan or interest rate reduction refinance loan. It is not a standalone home loan product. In addition, your EEM and your purchase or refinance loan must close at the same time.
How much can I finance?
Borrowers can use a VA EEM to finance up to $6,000 in energy-efficient improvements.
FHA energy-efficient mortgages
An EEM backed by the Federal Housing Administration may be used for condominiums, manufactured homes and buying or refinancing new or existing construction.
How much can I finance?
For existing energy-efficient homes: When buying an already energy-efficient home, the FHA allows lenders to "stretch" your qualifying ratios 2 percentage points above the standard limits to account for the energy savings. This will enable borrowers to qualify for higher loan balances.
When financing upgrades: Generally, the FHA allows borrowers to finance cost-effective energy improvement packages that meet specific parameters. "Cost-effective" means the cost of the upgrades equals or is less than the money saved on energy from those improvements.
You can see the full guidelines for FHA EEMs on the U.S. Department of Housing and Urban Development website.
What projects are allowed with an energy-efficient mortgage?
Conventional, VA and FHA energy-efficient mortgages each set guidelines for allowable upgrades. However, the most common projects are on all three lists. Ask your mortgage lender for details if you're unsure what's allowed.
Energy-efficient improvements financed through an EEM can include:
Heating, ventilation and cooling systems.
Energy-efficient windows and doors.
Caulking and weather-stripping.
Low-flow water fixtures (e.g., toilets, showers).
Home insulation and weatherization.
Energy-saving appliances, such as refrigerators, water heaters, washers and dryers.
High-efficiency light bulbs.
Renewable energy, such as solar, wind or geothermal systems.
The HomeStyle Energy Mortgage from Fannie Mae also lets homeowners finance the cost of natural disaster readiness through an EEM. This can include:
Retrofitting foundations (to protect from floods, earthquakes, or high winds).
Adding retaining walls or storm surge barriers.
Removing bushes and trees (in wildfire-prone areas).
Pros and cons of energy-efficient mortgages
Energy-efficient mortgages have numerous advantages, but they don't fit every homeowner. Here are some things to consider.
More borrowing power: If you meet the qualifications, you can qualify for a larger loan to afford an energy-efficient home. Compared to other types of financing, an EEM can also offer lower interest rates since the cost savings of energy efficiency are factored into the loan.
Lower utility bills: The savings from lower monthly energy bills often offset the cost of a higher mortgage payment.
A more comfortable home: You don't have to tolerate chilly drafts or inefficient appliances while you save up for future upgrades. An energy-efficient home can also prevent allergens or health hazards such as mold.
A boost in the potential resale value: An energy-efficient home can increase resale value between 2%-8%, according to EnergyStar.gov.
Limited lender options: EEMs still aren't as common as other types of home loans, so you have a smaller list of lenders to choose from.
Not all projects are eligible: As the name suggests, you're limited to energy-efficient upgrades. So if you want to tackle cosmetic improvements or other structural projects that don't involve energy efficiency, another option might be a better fit.
Paperwork and approvals: If you only have small projects on your to-do list, paying cash might be simpler than financing through an EEM.
Alternatives to energy-efficient mortgages
Maybe you need to borrow more than the limits set by an EEM — or perhaps you don't want to deal with the paperwork. Here are some alternative mortgage types to consider:
Renovation loans. The three major types of renovation loans cover most home improvements, whether major or minor. Options include the FHA 203(k) loan, insured by the Federal Housing Administration, the HomeStyle loan, guaranteed by Fannie Mae and the CHOICERenovation loan, guaranteed by Freddie Mac.
Cash-out refinance. If you own your home, a cash-out refinance lets you take out a loan larger than your mortgage balance, using your home as collateral. Then, the difference between the new, larger loan and the balance on your previous mortgage is paid to you in cash.
Home equity loan. This lets you tap some of your home's value for cash. You receive a payment in a lump sum, then repay the home equity loan at a fixed interest rate over time.
Home equity line of credit. This option gives you flexibility in borrowing against your home's equity, somewhat like a credit card. Most HELOCs have adjustable interest rates.