How to save on utility bills, get a bigger loan, and contribute to the future of our planet? At first glance, it may seem that these things are not interconnected. Although all these issues are solved by energy-efficient mortgage or green mortgage. The US Green Mortgage (sometimes referred to as the Energy Efficiency Mortgage — EEM) is a special type of mortgage loan. It is intended to finance the purchase or refinancing of a home that meets certain environmental standards.

Why do you need a green mortgage?

You can finance energy savings with a single mortgage, increasing your debt-to-income ratio and getting a larger loan. The more energy efficient and green your home becomes, the more credit you can get. The biggest reason to apply for an EEM instead of a standard mortgage is to help the buyer increase the amount of the loan they are eligible for. A higher level of energy efficiency at home will also lead to lower utility bills and less harmful emissions into the environment.

How does an energy-efficient mortgage work?

To get an EEM, you need an energy estimator to evaluate the energy efficiency of a home using the Home Energy Rating System (HERS). The estimator considers factors such as insulation, appliance efficiency, window types, local climate, and utility rates. The report includes an overall home rating index, recommended economical upgrades, cost estimates, annual savings, useful life extension, improved post-upgrade rating index, and an estimated annual total energy cost for an existing home before and after the upgrade.

There are three types of EEMs:

  • Regular via Fannie Mae and Freddie Mac
  • US Federal Housing Authority EEM
  • Veterans Administration EEM 
The US Federal Housing Administration has a database of banks offering EEMs that can be searched by state, county, zip code, or other criteria.

Restrictions and requirements

Of course, everything is not as perfect as we would like. There are certain restrictive rules for green mortgages — the amount of financing depends on them.
  • For example, Fannie and Freddie Mac's specifications state that the maximum funding available is 15% of the ‘completed’ value of the property. This refers to the estimated value of the house after the modernization is completed.
  • Estimating your home's energy consumption is another important step. A qualified specialist analyzes the property, its compliance with green standards and gives recommendations for improvement. This step precedes funding approval. So the expert predicts the cost of upgrades and potential savings for each item: light, heat, and so on.
  • Homeowners undertake to conclude an agreement with the contractor and complete the work on time. Usually, it is quite short — from 3 to 6 months. And here it is worth considering because perhaps you dreamed of a slow, thorough repair of your home. In that case, try to consider another type of funding.
  • We recommend contacting lenders who regularly deal with green mortgages. So you will be sure that you are working with professionals and they will be able to provide you with the most favorable conditions. For example, the lender may be familiar with a good energy efficiency estimator.

Here are some benefits of a green mortgage:

  • Low-interest loan.
One of the main advantages of a green mortgage is a low-interest rate loan. Banks and other lenders provide such loans at a lower interest rate than conventional loans. And it can significantly reduce your monthly payments.
  • Improved housing energy efficiency.
Housing financed by green mortgages usually has improved energy efficiency. For example, it uses less energy to maintain a comfortable temperature or has solar panels. This can result in substantial savings on electricity and gas over the life of the loan.
  • Availability of special benefits and subsidies.
Some government programs, such as the Housing Energy Efficiency Program, provide incentives and subsidies for green mortgages. These programs offer guarantees or support to lenders that reduce the cost of credit or increase credit availability.
  • The increased cost of housing.
Housing that meets environmental standards may have a higher value in the real estate market. This is a fairly profitable investment if you plan to sell your home in the future. 

But there are also disadvantages of green mortgages:

  • Before applying to the bank, you need to conduct an energy audit. First, a certified company must confirm that the house requires energy re-equipment. Without this procedure, unfortunately, nothing will work. The good news is that there are many such companies and they work quickly.
  • The installation of energy-efficient equipment must be completed within 3-6 months from the date of the mortgage (or refinancing decision). But this shouldn't be a problem, because now many companies are working with good, proven solar modules that can be bought without delay.
  • The cost of energy-efficient equipment eligible for the "green mortgage" interest rate (together with the cost of installation) cannot exceed 15% of the value of the house. For example, if a house costs $100,000, you can request no more than $15,000 to purchase a solar power plant.

Refinancing into green mortgages

A good option for those who already own a property. Green refinancing will allow you to include the cost of renovations in your mortgage and improve living conditions. However, if you've already refinanced at record-low interest rates, this step is unlikely to pay off and simply won't benefit you. However, there are scenarios where refinancing might make sense, such as for new homeowners who can't afford repairs when they buy a home. Or for those who haven't owned property long enough to take out a home equity loan. In this case, refinancing into a green mortgage might make sense—at a minimum, it will not only improve your home but also make it more modern.

Conclusion 

Always compare offers from several lenders before making a final decision. An energy efficiency loan is a rather unusual solution and a serious commitment. So I want to make sure everything goes well. And you can not only get good funding but also do a good job for the environment. For any questions about mortgage financing, you can always contact LBC Mortgage. Sign up for a consultation and together we will take the first step towards buying a home!