Mortgages are not a very exciting topic, but they are a necessary one for those considering home ownership. For those considering green home ownership, a fairly recent development in the world of mortgages might be just what you're looking for, the energy efficient mortgage. Piloted in California (among other states) in 1995, it is a program that has been put together by the US Department of Housing and Urban development with the goals of making energy efficient homes more affordable for people, as well as improving the energy efficiency of existing homes. It's actually just like a regular mortgage, just with added benefits. Unfortunately, less paperwork is not one of them, but anyone who can qualify for a conventional mortgage can qualify for an energy efficient mortgage. In general, energy efficient mortgages make it easier for potential home owners to qualify for loans to purchase homes that need specific energy-efficiency improvements. Benefits depend on your lender, but all energy efficient mortgages rely on one criterion: how energy efficient the home is or can be made. So, if you can keep you're yawning to a minimum, we'll explain how the energy efficient mortgage, works, and how it can help you.

 

There are three types of energy efficient mortgages, or EEMS: the conventional EEM, the FHA EEM, and the VA EEM. In order to qualify for any these types of mortgages, the energy efficiency of the home in question must be established. This can only be done though an official energy rating report, called a HERS, or Home Energy Rating Systems report. So, once you find a home you would like to purchase (or decide you would like to make energy efficient improvements to your home) notify your preferred lender. They will then begin the process by sending a trained Energy Rater to perform a HERS report on the home. This report rates several categories from 1 to 100, with higher scores meaning the home is more efficient. Categories that are considered include an overall score for the home, recommend cost effective upgrades, estimated costs and annual savings of upgrades, and an estimated annual total energy cost for the home, before and after the upgrades are made. A cost effective upgrade is one that will save the home owner more money through energy savings than it will cost to install. If the report follows US Department of Energy recommendations, it may also include a star rating system from one to five plus for the overall rating of the home. The rating process usually costs $100-$300, and may be paid for by the buyer, seller, lender, or real estate agent. Even if you are the one that has to pay for the report, consider it a good investment, as it could potentially save you hundreds of dollars a year, increase your buying power, or at the very least assure you that you are doing all that you can to keep your home efficient and cost effective. 

 

Once the HERS report is completed it will be sent to your lender. He or she will evaluate the report with you, and if it indicates that you can save money by making energy changes in the home, than you are qualified for an energy efficient mortgage! If the HERS report indicates that the home is already energy efficient, an EEM may still be for you. If you are looking into purchasing an energy efficient home, your lender can take into account the lower utility payments you will be making and add that to your purchasing power. Your lender can tweak the ratios used to qualify you for your loan, increasing the amount of your loan, and therefore your purchasing power. With an EEM, you might be able to purchase a larger home or a home in a better location just because it's energy efficient!

Once you and your lender have established that the home qualifies for an EEM, you will need to discuss which type is right for you. There are three types of EEMs – the conventional EEM, the FHA EEM, and the VA EEM. Each type is available in all 50 states.   

 

The conventional EEM can be offered by any lender that sells their loans to Fannie Mae or Freddie Mac. The lender takes your HERS report and looks at the estimated amount of money you will save by making the energy efficient changes to your home. This amount is then added onto the value of your loan. So for example, if you would normally qualify for a $150,000 Fannie Mae loan and you have a HERS report conducted that says you will save $5,000 a year by making energy improvements to your home, your EEM will be $155,000.

FHA, or Federal Housing Administration, loan calculations are a little different. In this case, instead of looking at estimated money saved by making energy efficient changes, the FHA takes into account the estimated cost of implementing the cost efficient improvements on your HERS report. Up to 100% of this cost can then be added to your loan, up to $4,000 or 5% of the value of your home (up to $8,000), whichever is greater. So for example, if you qualify for a mortgage of $150,000,  the estimated cost of making improvements is 5% of your home's value which is $7,500, you would qualify for $7,500 to be added to your loan. 

 

A VA, or Veteran's Administration, EEM is only available to qualified member of the military, and can be applied to the purchasing of a new home or updating your existing home. A VA EEM can is capped between $3,000 or $6,000 depending on the improvements, and as with the other types of EEMs, a HERS report must first be completed. 

 

Once you and your lender have decided on they type and amount of your EEM, you have closed on the house and moved in, you must make the cost efficient changes indicated on your HERS report to receive the extra funds that you qualified for using your energy efficient mortgage. 

Essentially, energy efficient mortgages save you money because although your loan amount increases, after the energy efficient changes are made, the additional amount of your loan payments will be less than the amount saved on energy costs. So, let's say an energy efficient mortgage payment costs you an extra $20 a month as opposed to a traditional mortgage, but because your home is now energy efficient, your energy bills have dropped from $200 a month to $100 a month, a savings of $100. That means even with the larger loan payment, you are still saving $80 a month!

 

Energy efficient mortgages are a great idea – for you and the environment. They can help you save money, and you will be saving resources, all while getting one step closer to purchasing your dream home. For those in the San Diego area, check out the California Energy Commission's website, which gives a list of lenders that provide energy efficient mortgages. If you are in the process of buying a home, ask your lender about an energy efficient mortgage – you've got nothing to lose!

Some resources to get you started!