What is an energy efficient mortgage?
Living in an energy efficient home is desirable for many reasons. Not only are energy efficient homeowners taking steps to live more …
Living in an energy efficient home is desirable for many reasons. Not only are energy efficient homeowners taking steps to live more sustainably, they are also saving money by using less energy. If you are considering buying a home that meets energy efficiency standards, or if you want to make improvements to your home with a focus on sustainability, you may want to consider an energy efficient mortgage, sometimes referred to as a green mortgage.
There are both conventional and government-backed MEEs in the market. Here is an overview of how to get an MEE, the types of MEEs available, and the potential pros and cons of this type of mortgage.
What is an energy efficient mortgage?
An EDC allows you to borrow more money to finance the purchase or refinance of a home compared to a traditional mortgage and use the money from the purchase price to finance improvements that will improve the home. your home’s energy efficiency and, in some cases, its water efficiency. If you are buying or refinancing a home that is already energy efficient, an EEM may still allow you to borrow more because the lender may consider your utility savings.
The maximum amount of funding you can add to your loan may depend on the type of EEMS and the utility savings you will save with any change. You may be able to use the funds generated by your EEM to pay for programmable thermostats, solar water heaters, water-saving toilets, and a host of other changes.
“These programs are certainly starting to pop up everywhere due to their popularity and concerns about global warming,” says Jenna Gray, senior vice president of mortgages and branch manager for Guaranteed rate.
While you can have higher mortgage payments with an EEM, any additions or updates funded in the mortgage will ideally generate enough savings to make up for the larger loan amount.
â€œTypically, homeowners who live in areas with high energy costs benefit the most from green mortgages,â€ says Jacob Channel, senior economic analyst at LendingTree. “For example, a person living in a hot city like Phoenix, Arizona could potentially save thousands of dollars over the years by reducing their electricity bills by making their home more energy efficient.”
How to get a green mortgage?
When buying a home, you will need to get approved for a mortgage then get an EEM from your lender to increase your purchasing power for the renovations. If you already own a home, an EEM could be an ideal alternative to traditional financing options like home equity loans and lines of credit.
[Read: Best Home Improvement Loans. ]
Obtaining an EEM may require additional review and approval to ensure that your home meets or can meet energy efficiency standards. Sometimes you will need a home energy assessment from a qualified appraiser. For example, Home Energy Score certified assessors and home energy assessors certified by the Residential energy service network work all over the country.
An energy report should help determine what improvements are possible and estimate both how much they will cost and how much savings they would produce.
â€œThere are rules and restrictions on what will be deemed acceptable for financing, so the owner does not have full autonomy to decide 100% of what can and cannot be done,â€ says Gray.
What types of EEM are there?
Green mortgages are available from private lenders, the Federal Housing Administration, and the Department of Veterans Affairs.
– Private lenders. Fannie Mae and Freddie Mac, which are government-sponsored private companies, make EMEs available to private lenders with their HomeStyle Energy and GreenCHOICE mortgages, respectively. HomeStyle Energy and GreenCHOICE loans allow borrowers to finance improvements that cost up to 15% of the appraised value of the property â€œafter completion,â€ which is the value the home is expected to have after renovations. A borrower with a home worth $ 300,000 could get up to $ 45,000 to spend on improvements. If you match your EEM with the Freddie Mac Home Possible Mortgage or the Fannie Mae HomeReady Mortgage, you could put as little as 3% down.
– The Federal Housing Administration. The FHA Energy Efficient Mortgage Program, which became available nationwide in 1995, can add additional funds to the purchase or refinancing of the borrower’s loan. The FHA requires an energy assessment of the home to show that the changes are cost effective, which means you should save at least as much as you will pay for the upgrades. It may be possible to obtain funding up to the full cost of the upgrades. To get an FHA EEM, the borrower only needs to qualify for the original loan amount. The funding you receive for home improvements can cover materials, labor, and other expenses.
– The Department of Veterans Affairs. A VA EEM adds funding to a VA purchase or mortgage refinance. Loans often cap at $ 6,000, but can go higher. For EMTs valued between $ 3,001 and $ 6,000, the lender will have to conclude that the decrease in utility expenses is likely to offset the increase in mortgage payments. The lender may use information from sources such as utility companies or state agencies in their assessment, according to the VA.
[Read: Best VA Loans.]
Without knowing a buyer’s individual situation, it’s hard to say which type of EEM is the best, Channel says.
â€œFor example, a veteran might benefit from finding a VA energy efficient mortgage, while an FHA EEM might be a better bet for a first-time buyer or a low-income buyer,â€ Channel explains. â€œAs with any mortgage, one size doesn’t necessarily fit everyone, so if you’re thinking about getting a green mortgage, you’ll need to carefully consider your personal financial situation before you apply for a specific program.â€
[Read: Best FHA Loans.]
What upgrades could be part of an EEM?
There are a variety of renovations that could be covered by an EEM, including:
– Obtain double glazed windows.
– Repair or replace furnace ducts and insulation.
– Install elements to improve water efficiency.
– Make improvements to bloat.
– Make repairs to recover from environmental disasters.
What are the advantages and disadvantages of EEM?
– Go green. If you care about the environment, an EEM could be a great financial vehicle for you. Green mortgages can be a good idea even for homeowners “who aren’t currently spending a lot on things like electricity, but still want a more eco-friendly home or a home that is better equipped to cope with challenges.” things like climate change, â€Channel explains. .
– Increase your loan amount. An EEM might provide you with a larger loan than you might otherwise get.
– Benefit from a reduced down payment option: HomeStyle Energy Mortgages and GreenCHOICE Mortgages “can be combined with HomeReady programs from Fannie Mae or Home Possible from Freddie Mac,” says Gray. These programs, available to low-income buyers, require as little as 3% down payment.
– May take longer. The extra set of approvals you might need for energy efficient renovations can lengthen your mortgage process. â€œIn a fast-paced market, they might be difficult to use for purchases, unless the property has been on the market for a while and doesn’t have other interested parties or offers,â€ Gray said.
– Everything is not covered. Depending on the type of EEM, you may find that the upgrades you want to perform are not covered.
– Higher long-term loan costs. You could be spending more money over the life of your loan because you take out a larger amount and have to make higher monthly payments, Channel explains. Ideally, however, your lower monthly utility payments will offset the increased mortgage costs.
Channel advises borrowers to weigh the pros and cons of MEEs before making a decision. â€œMake sure the potential downsides, like a longer approval process or a larger loan, are worth the benefits, like lower utility bills or a more environmentally friendly home,â€ Channel said.
[Read: Best Mortgage Lenders.]
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