by Nick Gromicko and Rob London
An "energy-efficient" mortgage (EEM) is a mortgage
that factors in a homeowner's or home buyer's
efforts to conserve energy. These loans allow borrowers to reduce
their utility bills by financing the cost of incorporating
energy-efficient features, such as certain lighting and window
options, into a new or existing home. An energy audit is required
to determine the estimated energy savings of proposed efficiency
While they comprise just 1% of the total home loans in the
U.S. after 30 years in existence (according to a
New York Times estimate), EEMs are experiencing
popularity again. This expansion is partly fueled by cooperation
from banks, whose incentives to offer EEMs are quite simple:
owners of “green” buildings have lower operating
costs than owners of conventional homes, and these lower costs
enable them to afford larger mortgages. Wells Fargo, for
instance, has invested $3.25 billion in green buildings since
they launched their Environmental Commitment Program in 2005.
How to Qualify for an EEM
To qualify, homeowners must submit the house or construction
plans for an energy audit, arranged by the prospective
lender. The lender will then use the audit to determine which
energy improvements will save more money than they cost.
Specifically, the lender will want to see two things:
- that the monthly utility savings generated by the
improvements are greater than the added monthly cost of the
energy-efficient mortgage; and
- that the total savings are greater than the total costs over
the lifetime of the improvement, including maintenance
In some cases, an improvement that is not found to be
cost-effective may be financed anyway if all of the improvements,
together as a package, pass the cost-effectiveness test. The
energy audit, which may cost several hundred dollars, may be
financed as part of the EEM.
- Conventional EEMs, offered by Fannie Mae and Freddie Mac, are
the most widely available EEMs. Homeowners can spend up to 15% of
the appraised value of the home on energy improvements and
thereby qualify for a loan that is 15% greater than they would
have received under normal conditions. In addition to allowing
the lender to increase the borrower’s loan by a dollar
amount equal to the estimated energy savings, these loans also
adjust the value of the home to reflect the value of the
energy-efficiency measures. This perk removes the possibility
that the real estate agent will ignore energy-efficient
improvements while assessing the home’s value.
- Federal Housing Administration (FHA) EEMs allow lenders
to add the costs required by energy improvements to a mortgage
loan that has already been approved. These loans are available
for site-built as well as for manufactured homes. The addition
cannot exceed $4,000 or 5% of the value of the home, whichever is
greater, up to a maximum of $8,000.
- The Veteran’s Administration (VA) EEM is restricted to
qualified reservists, veterans, and other military
personnel. The VA caps loans for energy-efficient improvements at
between $3,000 and $6,000.
- ENERGY STARÂ® EEMs, while still under development,
will incorporate the costs of energy-efficiency improvements into
the loan itself, allowing borrowers to pay for those investments
over the life of their loan, and to deduct the interest from
their federal and state income taxes. Participating lenders also
offer borrowers additional financial benefits beyond the value of
the home energy savings, such as discounted mortgage rates,
reduced loan fees, and assistance with closing costs.
To determine a home's energy rating, an energy
audit is conducted by an investigator who works in
accordance with qualification standards created by the U.S.
Department of Energy. The inspection takes into
account everything from the types of insulation and windows
installed, to the efficiency of the heating and cooling systems
and other major appliances.
In summary, lenders offer a number of different types of
mortgages to help borrowers afford energy-efficient improvements
for their homes.