A Guide to Green, Energy-Efficient Mortgages

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As the name implies, a “Green Mortgage” is an environmentally friendly type of home loan.

They’re also known as Energy Efficient Mortgages (EEMs), and their purpose is to make your home more energy-efficient while saving you money.

Green mortgage loans can be added to the mortgage you use to purchase a home or rolled into your current mortgage through an energy-efficient refinance that lets you make improvements to the home you have now.

Proceeds can be used for double-paned windows, tankless water heaters, a high-efficiency furnace or air conditioning system (HVAC), new insulation, and other similar purposes. The goal is to create a more environmentally friendly and comfortable living space with significantly lower costs for heating and cooling. 

Unlike a home equity loan or home equity line of credit (HELOC), EEMs aren’t a type of second mortgage. Though created as a separate loan, they are ultimately rolled into your primary mortgage, so you only make one monthly mortgage payment.

What are Energy Efficient Mortgages?

Although Green Mortgage is often used, the official term for this type of loan is Energy Efficient Mortgage (EEM). The primary purpose of EEM programs is to enhance homes to help them use less energy and produce savings for homeowners.

An EEM is not a second mortgage. It is a loan rolled into your primary mortgage when you buy a home or refinance. You only make one mortgage payment every month, and there’s no additional lien on your property.

Suppose you want to purchase or build a home and add energy-efficient features. In that case, typically, you’ll get approved for a regular first mortgage and apply for an EEM that is rolled into that mortgage to specifically pay for energy-efficient upgrades.

If you’re refinancing a mortgage and want to add energy-efficient renovations, you would get an EEM and roll it into the new loan.

When you purchase a new home with energy-efficient amenities, lenders recognize that your utility payments will be lower and will let you qualify for a greater overall mortgage amount.

To make things even easier, you don’t have to do anything to qualify for an EEM. If you already qualify for your main mortgage, in most cases, you will also qualify for an EEM. Another good thing is that you don’t have to make an additional down payment on the EEM.

EEM Programs are supported by the same entities that back the overwhelming majority of residential mortgages in the United States: the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and Fannie Mae and Freddie Mac. 

Energy-efficient mortgage lenders include banks, mortgage companies, savings and loans, and credit unions. They are all places you would get a regular mortgage.

EEMs require an extra underwriting process before loan approval and follow strict loan limits. It may also increase the amount of a required downpayment and typically enforces stringent requirements, including a minimum credit score. 

Potential Green Mortgage Savings

Consider the following:

  • Overall, heating and cooling accounts for 50–70% of the total energy used in the average American home.
  • 60% of the existing homes in the U.S. are not properly insulated.
  • Updating your home’s insulation can save up to 20% on heating and cooling costs or up to 10% of your yearly energy bill.
  • According to the Department of Energy, energy loss from outdated windows accounts for nearly 25% of the average American home’s annual heating and cooling costs.
  • Even the most basic double-paned window can reduce energy use by up to 24% in cold climates during the winter and up to 18% in hot climates during the summer.
  • About 20% of the air is lost in houses with central air and heating due to faulty, outdated ductwork.
  • A new Energy Star-rated dishwasher uses less energy (a dishwasher typically accounts for 2% of your gas or electric bill) and can save as much as 1,200 gallons of water a year.
  • Programmable thermostats can save about 2% on heating bills and more than 3% on cooling bills. These numbers can translate into savings of up to $180 a year.

Are There Different Kinds of EEMs?

There are several EEM Programs. You’ll need to talk to your lender about which makes the most sense for your circumstances.

Conventional Energy Efficient Mortgage

This loan is offered by lenders who sell their loans to Fannie Mae and Freddie Mac. It is the most powerful of the EEMs because it allows you to borrow up to 15% of the home’s appraised value for improvements. To qualify, a 620 minimum credit score with a 3% down payment is required.

FHA Energy Efficient Mortgage

This EEM does not let you borrow as much as a conventional EEM, but you can take advantage of the benefits of FHA financing. You can borrow up to 5% of whichever of the following is the least:

  • your home’s appraised value
  • 115% of the median area price of a single-family home
  • 150% of the conforming Freddie Mac limit for that area.

You can take out an EEM loan as a 15- or 30-year fixed-rate mortgage or an Adjustable Rate Mortgage (ARM) from an FHA-approved lender. A 580 minimum credit score is required to qualify with a 3.5% downpayment. The score drops to 500 with a minimum 10% down payment.

VA Energy Efficient Mortgage

This EEM is for qualified veterans and current military personnel. It can only be used when purchasing or refinancing a home.

It allows you to borrow up to an additional $6,000 for energy-efficient upgrades if the projected energy savings exceed the resulting increase in mortgage payments or $3,000 based solely on the documented cost of the improvements. A 620 minimum credit score is required to qualify.

The GreenCHOICE Mortgage

This program originates from Freddie Mac and covers energy-efficient improvements, like solar water heaters and low-flow water fixtures for new or existing homes.

You can borrow up to 15% of the appraised property value after energy improvements. A 660 minimum credit score with a 3% down payment is required.

Except for VA Energy Efficient Mortgages, there is no fixed cap on how much you borrow for energy improvements other than conventional FHA Energy Efficient Mortgages that are a percentage of your home’s value or a figure related to local home values.

Also, a lender may offer one or all three types of EEM loans. It’s best to shop around to understand various terms and conditions.

Who is Eligible?

If you qualify for a regular mortgage, in most cases, you already qualify for an EEM. 

For the EEM to be eligible for inclusion in the mortgage, the energy-efficient improvements must be cost-effective. That means that the total cost of the upgrades has to be less than the full value of the energy saved over the operative life of the improvement.

For example, if a new double-paned window costs $300, it needs to save more than $300 in energy costs over the course of its life.

To get an EEM, you must find out what improvements your home needs by following official recommendations in the form of a Home Energy Rating System (HERS). HERS is an evaluation of how energy-efficient your home is.

You’ll find a trained Energy Rater through your lender. The rater will go to your home and complete an inspection to find out how energy-efficient it is. The rater will factor in insulation, windows, heating and cooling systems, and local climate to give the home an overall rating. 

 A HERS report includes:

  • An overall rating for the house as it is.
  • Recommendations for cost-effective energy upgrades.
  • Cost estimates of the price, savings, and life of energy-saving upgrades.
  • An estimate of the house’s rating after the upgrades.
  • Before and after estimates of annual energy costs for the home.

A HERS rating costs $300 to $800. You can finance it as part of the loan if it isn’t paid for by the buyer, seller, lender, or real estate agent.

Your HERS rating will help you determine how much money you qualify for and what upgrades to spend on. 

Upon approval and when the loan closes, the lender puts the money into an escrow account. The mortgage owner then has 90 to 180 days to hire professionals to make the improvements.

Funds are paid to the borrower after an inspection to verify that the improvements have been made and the energy savings are real.

EEMs for Small Businesses

Energy efficient efforts and retrofits help improve the bottom line of any business with lower operating costs.

Unfortunately, there are currently no commercial versions of the EEM Programs. However, some alternatives provide businesses with the basic benefits of Energy Efficient Loans. These include:

  • Small Business Administration Loans, including the 7(a) loan and the SBA 504 loan
  • State energy efficiency financing programs
  • Commercial PACE loans

These loans allow small and medium businesses to:

  • Retrofit facilities
  • Purchase energy-efficient equipment
  • Utilize energy-efficient construction
  • Buy alternative fuel for vehicles
  • Replace a transportation fleet with hybrid and improved-mileage vehicles
  • Increase efficiency with a new HVAC, heat pumps, and insulation
  • Install energy-efficient power and light bulbs
  • Utilize new sources of energy, including wind, solar, and geothermal
  • Install energy-efficient doors, windows, and skylights

Small Business Administration (SBA) Loans

The SBA does not make loans, but it does guarantee them. Several lenders offer these SBA-guaranteed loan programs to help small businesses.

Applicants must meet the SBA’s and the lender’s requirements to get approved.

504 Loan Program 

This program targets small, brick-and-mortar businesses that need financing for fixed assets like real estate or equipment. It can also be applied to fixed asset projects like purchasing land and constructing new facilities or modernizing or renovating existing facilities.

A new version of the 504 Loan called the Green 504 doubles the maximum amount a business can get from $4 million to $2 million with a 10% down payment. To get this higher amount, the business must purchase, construct, or retrofit facilities with energy-saving technologies that result in at least a 10% decrease in energy consumption. Renewable energy projects like solar and wind are also covered.

7(a) Loan Program

This is SBA’s primary program to help start-ups and small businesses obtain financing when they might not be eligible for loans through regular lenders. Though it isn’t explicitly earmarked for energy-efficient projects like the Green 504, it can be used for green projects.

These loans are for a maximum of $2 million.

State Energy Efficiency Financing Programs

Most states offer low-interest loans and other subsidies to help small businesses become more energy efficient. To find out what programs are available in your area, visit the National Association of State Energy Officials website for details.

For More EEM Info

Talk with an EEM lender for a more complete understanding of EEMs.

Kirk Haverkamp

Kirk Haverkamp is an award-winning reporter and editor with more than 25 years of experience in journalism and public relations. He has contributed to Credit.com, Investopedia, and MetroMode online magazines, among other work. He has a B.A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.

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