Energy Efficient Mortgage

What is an EEM?

The Energy Efficient Mortgage is calculated on the energy efficiency of the home. Borrowers can finance their home cost effectively and earn special benefits on new homes already energy efficient or plan to make energy efficient improvements to existing homes.

The main benefits are that borrowers qualify for a larger loan, allowing borrowers to finance the energy improvements with the money saved from the amount saved from the usual utility bills, and continue saving from their energy efficient home. The borrower must provide the lender with an idea of their monthly energy savings, this requires an energy rating that will value the energy efficient savings of the improved or already Energy Efficient home.

Lower utility bills means more money in your bank every month which ultimately will allow you to buy a more comfortable, possibly larger or better located home and of course continue saving.

The fact is the Energy Efficient Mortgage will save you money whether you are buying, remodeling or refinancing your home.

Why EEM?

Energy improvements can be financed through part of the mortgage.

An older home can become more comfortable, energy efficient with less running costs, freeing up cash for your pocket.

Loans for Energy Efficient homes become more versatile with regards to income - loan amount.

An increase in the loan amount gives you more power to buy a higher quality home in a more preferred neighborhood that is Energy Efficient with less running costs.

Buyers, Sellers, Remodelers and Refinancers all Benefit From EEM.

Buying:

  • Increase in Loan amount for a home upgrade
  • Qualification for a larger loan
  • Affording a more comfortable home of your choice
  • From the day of your purchase you save money
  • The resale value of your home has more potential

Selling:

  • Sell your home quicker
  • Make improvements that will save you money
  • Your home becomes more attractive to buyers
  • Stand out in the real estate market

Remodelers/Refinancers:

  • Make money by making improvements
  • More attractive to buyers
  • No moving costs and upheaval to get the EEM benefits.

Home Energy Ratings System (HERS report)

This report is taken by a HERS professional and evaluates the energy efficiency of a home. The main factors are, insulation, appliance's and energy consumption, types of windows, local climate, and utility costs.

The HERS rating includes:

  • An assessment of the house before improvements
  • Collated list of energy efficient recommended upgrades
  • Estimated cost
  • Estimated yearly savings
  • The new energy efficient rating after the recommended improvements
  • An estimate of the energy costs per year before and after the improvements.

The rating is indexed between 1 - 100, the lower the grade the higher the efficiency.

The most cost effective energy efficient improvements are the ones that will save you more money than they cost to be installed.

The costs of a HERS report is from $300 to $800 and is paid for by you or a real estate agent. This cost can also be included in the mortgage finance. By having this report you are investing in 100's of dollars of savings per year for you or your buyer.

An Example of Why the EEM Works

An energy efficient home may begin with a higher price, however here is an example of how it will cost you less.

This example is a 90% mortgage with 8% interest!

Existing home with no improvements Same existing home with energy efficient improvements
Price $ 150,000 $ 154,816
Loan $ 135,000 $ 139,334
Monthly payment $ 991 $ 1,023
Energy bills $ 186 + $ 93 +
Total monthly cost $ 1,177 $ 1,116
Savings $ 0 $ 61

These mortgage payments are an estimated example, and do not include insurance and taxes.

The savings in this example are only for this mortgage example and will vary depending on the home and mortgage loan.

When applying for an EEM the lenders recognize the potential savings the improvements will make. For example the above home in the table qualified for $4,816 in energy efficient improvements. This cost can be incorporated into your mortgage giving you an easier option to pay it monthly within your mortgage repayment. You can start saving as soon as your improvements are complete.

As long as you have a home that has a certain rating for energy efficiency another option is to apply for a higher mortgage amount. The home's improvements must meet the standards of the International Energy Conversation Code (IECC) before the lender can stretch the percentage of the borrower's income and apply it to the mortgage. It gives the buyer more power to borrow on their income.

The Power to Borrow

A home without any energy efficient changes:

The monthly income of the buyer $5,000
Monthly payment with a ratio of 29% loan - income $1,450
90% mortgage value $207,300

An energy efficient home (2000 IECC):

The monthly buyer income $5000
Monthly payment with a ratio of 29% loan - income $1,650
90% mortgage value $235,900

An EEM adds a total of $28,600 extra borrowing power!

This example is based upon a 7.5% interest rate, with a 10% depots, spread over 30 years and is a principle and interest only mortgage with no insurance or tax included.

Just because the home was energy efficient the buyer was able to buy a home of higher value. This could mean more space, added comfort, preferred neighborhood and a home in better condition.

EEM Loans Available

The Federal Housing Administration (FHA) 203k program

The Federal Housing Administration, the FHA enables disadvantaged borrowers who would not normally qualify for a loan on such repayment terms buy a home or gain an improvement loan by insuring the loans through selected approved lenders.

The FHA 203k loan program covers new homes, upgrades, improvements for existing homes, and is currently available in all 50 states of the USA. This loan allows investors or buyers to apply for a single loan to cover the acquisition of the property and also the improvements after the loan has closed. This FHA program can be combined with an EEM

  • Loan limits may be exceeded
  • No re-qualifying
  • No additional down payment
  • No new appraisal
  • Either 5% of the property or $8000 or less can be finance.

Veterans Affairs (VA) EEM

For those veterans who have active duty service or are no longer in full active duty (reservists) but are assigned as reserved can qualify for mortgages that are guaranteed by the VA. These loans are available in the 50 states of the U.S and only qualified military personnel can apply. The mortgage loans can be used to buy a new home with Energy Efficient improvements or to refinance an existing home and include the extra amount needed to make Energy Efficient improvements.

On an existing home the loan cannot exceed 90 percent of the appraisal value of the home, and the amount for the improvements.

Interested clients need to apply using the usual home loan procedure and inquire about the EEM at the beginning of the application.

Fannie Mae and Freddie Mac EEMs

Fannie Mae have certain approved lenders who allow borrower's with no more borrowing power to stretch the loan - income ratio on EEM's. This enables borrower's to expand on their income ratio's. Freddie At this time the Fannie Mae EEM mortgages available are a fixed rate and adjustable rate, and the usual Fannie Mae application rules apply with variance allowed on the loan - income ratio's and adjustments to the appraisal value of the home.

Freddie Mac take into consideration the projected utility savings and allows the lender to incorporate this as the factor for the loan.

For more updated information on Fannie Mae and Freddie Mac Energy Efficient mortgages please visit their websites.

Which Buyers and Which Homes Qualify for an EEM?

Any buyer who has been accepted for a home loan can qualify for an EEM. The EEM's intention is to offer the buyer more benefits above their usual home loan deal. The Energy Efficiency rating (HERS) of the home will determine the benefits.

Most homes can receive an EEM and is not limited to any specific area, price or utility suppliers. The lender is there to help you select the loan option that is best for you and your circumstances.

  • EEM's on older homes that are accepted for improvements
  • EEM's on new or older homes that do not need improvements
  • EEM's on brand new homes

Some final points to remember!

/Try to get a HERS rating completed as soon as possible, as this helps other area's of the lending process to be done, and will not delay the closing of the loan. With an EEM the interest is tax deductible so you could get a higher tax deduction. This is a much less expensive way than paying for energy improvements with credit cards, small loans, and cash which normally do not qualify for any tax deductions./

EEM benefits will vary from home to home and borrower to borrower, the above examples will not apply to all cases and therefore each individual should seek advice from their lender on how they can benefit from an EEM.

A house could be your biggest investment ever. Use the Energy Efficient Mortgage and invest wisely.

If your plans are to refinance your current home, you should consider borrowing higher than you require to clear your current mortgage, and with the extra cash you can turn your home into an Energy Efficient home, saving you money, giving you a more comfortable home and of course preserving energy.

References

U.S department of housing and urban development
www.hud.gov

Alliance to save energy
www.pueblo.gsa.gov

Federal citizen information center
www.pueblo.gsa.gov

U.S department of veteran affairs
www.va.gov

Fanny Mae
www.fanniemae.com

Freddie Mac
www.freddiemac.com

The U.S Department of Energy
www.eere.energy.gov