Energy-Efficient Mortgages

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 measures.

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:

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.

EEM Types

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.
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