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Energy efficient mortgages are available to homeowners or new buyers through conventional, FHA, or VA loans.
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Energy efficient mortgages allow you to roll the cost of energy-saving improvements into the loan.
Homeowners with existing loans can pursue this opportunity through a refinance.
A professional must confirm upgrades as cost-effective, and homeowners have a fixed time to complete them.
Energy-efficient upgrades to your home aren’t just good for the planet. When the systems in your home use energy more efficiently, you might see significant savings in your utility bills. But for many homeowners, the hurdle of paying for repairs and upgrades up front is a deal breaker.
An Energy Efficient Mortgage (EEM) gives you the chance to finance energy-saving improvements over the loan term. Homeowners or new buyers looking for a way to make their environmentally-conscious goals a reality for their budget may find what they’re looking for in an EEM.
What is the energy efficient mortgage program?
Both homebuyers and homeowners can tap into the EEM program to purchase or refinance homes that meet certain efficiency standards. Beyond financing homes that already have robust energy-saving features, the program allows you to finance energy-saving measures as a part of the primary home loan.
The end result is the chance to cover the upfront costs of energy-efficient upgrades, which should lead to regular savings on your energy expenses. Potential upgrades include appliances, windows, furnaces, solar systems, weatherization treatments, caulking, and insulation.
Regardless of the upgrades you want to pursue, they must be deemed cost-effective to qualify. That means the total cost of the improvement must be less than the projected energy savings for its expected life.
Before closing on a home purchase, mortgage borrowers pursuing an EEM must have a trained professional conduct an energy assessment. They will provide the lender with information about the estimated monthly energy savings to see if the borrower qualifies.
Although the process of obtaining an EEM is more involved than obtaining a regular mortgage, the future savings of the eco-friendly choice could pay off in the long run.
Note: You can pursue an energy efficient mortgage as a homebuyer looking for a purchase loan or a homeowner looking to refinance.
Types of energy efficient mortgages
Energy efficient mortgages are available through Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and conventional loans. Each of the nationwide loan options comes with different features and requirements to consider.
1. Conventional loan
With a conventional EEM, you can put as little as 3% down at closing. A few of the allowed improvements include smart thermostats, energy-saving windows, and solar panels.
As a homebuyer, you may be able to borrow up to 15% of the appraised value of the home. Importantly, the appraised value of the home takes the value of the allowed upgrades into account, since many energy-efficient upgrades will also improve your home’s value.
For example, say the home’s current appraised value is $100,000. But considering the expected repairs and upgrades, the estimated appraised value increases to $150,000. With that, you could borrow up to $22,500 to cover eligible energy-efficient upgrades. Keep in mind that a professional may need to inspect the property to confirm that the plans are cost-effective.
Once you close on this type of loan, you’ll have 180 days to complete the upgrades.
2. Federal Housing Administration loan
The FHA loan is a popular option among homebuyers, thanks to less stringent credit requirements and a low 3.5% down payment option.
The FHA allows borrowers applying for the EEM to stretch their qualifying ratios, like their debt-to-income ratio, to two percentage points above the standard limit. Ultimately, this means that borrowers may be able to take on a larger loan amount.
The total cost of the improvements must be less than the projected energy savings, which are determined by a professional assessment. But there’s a cap on the amount you can borrow for improvements.
Generally, the borrowing amount is limited to a percentage of either the value of the property, the price of a typical single family home in the area, or the national conforming mortgage limit. For certain weatherization improvements, like thermostats and insulation, the limit is set at $3,500. The upgrades must be completed within 90 days of mortgage closing.
3. Veterans Affairs loan
VA loans are backed by the US Department of Veterans Affairs. The loan program is specifically available to qualifying service members, veterans, and spouses.
Typically, VA energy efficient mortgages have a limit of $6,000 on improvements. But in select cases, this limit can be exceeded. The loan for these improvements is added to the VA loan amount that you are already approved for.
Unless there are extenuating circumstances, the repairs must be completed within six months of closing.
Important: Most EEM programs require improvements to be completed within six months or less of closing. If repairs take longer than the time allotted, the lender might require the EEM funds to go toward mortgage repayment.
Advantages and disadvantages of an energy efficient mortgage
As with every financial product, EEMs come with some benefits and drawbacks to consider.
One advantage is the potential for saving money on utility bills. “By factoring in the anticipated energy savings from your home upgrades, an EEM can free up some extra cash each month that you can put toward other expenses,” says Matt Teifke, co-owner of a real estate brokerage in Austin, Texas.
Beyond the monthly savings, Teifke says, “Making your home more energy efficient can also make it more valuable. Energy-efficient homes tend to sell faster and for higher prices than homes that haven’t been upgraded. So, if you’re planning on selling your home in the future, an EEM can help you maximize your profits.”
But there are also costs to consider. “The main downside of an EEM is that it often comes with higher upfront costs,” says Teifke. Run the numbers for your situation to ensure the costs will pay off.
Advantages
Disadvantages
Lower energy bills
Eco-friendly choice
Potentially increase the home’s value
Add more to your loan amount, resulting in a larger monthly paymentPay more in interest Extra steps in the mortgage process
The bottom line
Obtaining an EEM opens the door to an environmentally conscious choice that could insulate your budget from rising energy costs. But the extra steps involved add more paperwork on your journey to the closing table.