Would You Like Your Home to be More Energy-Efficient? How to Pay for It with a Green Mortgage

The environment and your house will both benefit from an energy-efficient mortgage. Additionally, it reduces your utility bills, which benefits your bank account. While creating a budget for the purchase of a home, you are undoubtedly considering the two primary costs: a down payment and mortgage repayment. On the other hand, your monthly payment obligations may also increase significantly due to your utility bills. And if you live somewhere where you have to turn on your furnace on days when it’s below freezing or blast your air conditioner during a heat wave, get ready for even higher costs.

Some of those expenses can be brought under control with the aid of a green mortgage, also known as an energy-efficient mortgage. Homeowners can use energy-efficient mortgages (EEMs) to finance the purchase of energy-efficient upgrades like solar panels and weatherization systems or to build a more energy-efficient home.

What are green mortgages?

Homeowners who wish to reside in a home that doesn’t significantly deplete Earth’s resources can apply for a green mortgage. You as a homeowner can contribute to the conversation about how to meet the needs of the planet while governments and corporations argue over how to build new, energy-efficient homes or renovate your existing ones.

The best customers for EEMs are those who want to make long-term cost savings on utility bills or investments in affordable technologies. Even though it frequently costs more, having an eco-friendly property can have significant advantages.

How do green mortgages work?

A green mortgage might be a wise choice if you currently own a house and wish to refinance your mortgage to borrow funds for energy-efficient upgrades. Generally speaking, you can borrow up to 15% of the assessed value of your house.

If you’re not a homeowner yet, you can purchase an older house with a green mortgage and hire a contractor to make it more environmentally friendly.

As an alternative, you could finance new construction with an Energy Star certification, which is at least 15% more energy-efficient than homes that adhere to the current local building code, through the use of a green mortgage.

You will typically have to pay for an energy consultant to confirm that the upgrades meet specific energy-efficient standards before your financing is approved. The mortgage lender will be able to approve the amount you save through the process if you have a home energy assessment.

Which green upgrades are eligible for financing?

If you’re thinking of upgrading to something more environmentally friendly, find out if your plans are approved by a lender. Generally speaking, the Department of Energy states that the following kinds of projects are eligible for funding:

• New energy-efficient appliances like washers, dryers and refrigerators
• Energy-efficient windows
• Solar panels
• Furnaces, heat pumps, and HVAC systems
• Weatherization treatments
• Caulking and weather stripping
• Insulation
• Duct system repairs and installations
• Some roofing projects
• Programmable thermostats
• Enhancements that protect against natural disasters such as storm surge barriers, foundation retrofitting for earthquakes, and tree removal in fire zones

Types of green mortgages

There are numerous alternatives available for green mortgages. As you’ll usually need to begin or complete the work within a specific time frame to raise the property’s energy rating, be ready to begin construction on your project as soon as you receive approval.

Conventional energy-efficient mortgage

Comparable to a conventional mortgage, which necessitates a minimum 3% down payment of the purchase price, is a conventional EEM. To finance your project expenses, you can borrow up to 15% of the property’s as-completed value with a traditional EEM, though.

The FreddieMac GreenCHOICE Mortgage and the Fannie Mae HomeStyle Energy Mortgage are the two primary providers of green mortgages.

FHA energy-efficient mortgage program

The Federal Housing Administration has been running an EEM program since 1995, even though they may seem like a relatively new kind of loan. If you meet the requirements, you may contribute additional funds that are less than the adjusted value, less than 5% of the adjusted value, or less than 115% of the median area price of a single-family home or 150% of the federal conforming mortgage limit.

To find out if your plans qualify, look through the list of local lenders who have been approved by the FHA. The additional funds won’t be subject to FHA requirements; you only need to be eligible for the amount needed to buy the house.

VA energy-efficient mortgage

VA-backed EEMs are also an option if you’re a service member, veteran, or qualified spouse, though they’re not quite as extensive as some other EEM programs. Upgrades over $6,000 are difficult to get approved for (both the VA and the lender must approve), and some projects—like new roofs and Energy Star-rated appliances—cannot be financed.

How to qualify for a green mortgage

Many of the prerequisites for obtaining a traditional mortgage also apply to those seeking a green mortgage. Your lender will closely examine the following:

• Your credit rating: You might be eligible for a traditional EEM if your credit score is excellent—at least 620, but ideally above 700. If you qualify, you should consider an FHA-backed or VA-backed EEM if your credit score is less than 620.
• Your ratio of debt to income: Your outstanding debts, such as credit card debt, auto loans, school loans, and any other monthly financial obligations, will be examined by lenders. A DTI of less than 45% is generally required, though even lower is preferable.
• Your down payment: The only kind of EEM that waives this requirement is a green mortgage backed by the VA. You will need to be able to contribute a minimum percentage of the loan amount for another loan. If you’re a first-time buyer, make sure to look into options for funding your down payment and closing costs to help you come up with the necessary funds.
• Your record of energy efficiency upgrades: This is the main prerequisite that distinguishes conventional home loans from energy-efficient mortgages. To ensure that the work will reduce your energy usage, you will typically need to pay a professional to perform an energy audit.

Can I save money with a green mortgage?

You might be able to save a significant amount of money, depending on the kind of improvement you finance with money from a green mortgage. For an accurate estimate of your savings, you should first decide how long you intend to stay in the house. You can save more the longer you stay there.

Using EnergySage estimates, we can examine the average Arizona homeowner’s annual utility costs of $2,748. In about 7.5 years, the homeowner who installs a solar system should break even on their investment. Everything has a positive effect on your finances after that.

However, it goes beyond the future. Through 2032, homeowners can save up to $3,200 annually on energy-related home improvements by taking advantage of several federal tax credits. To optimize your savings, seek advice from a tax expert if one of your main objectives is to utilize tax credits for energy-related improvements.

Green Mortgages Alternatives

You have more options than just an energy-efficient mortgage if you want to update an older home. You may also take into account the following borrowing options, which won’t need any paperwork regarding the property’s energy efficiency:

Home equity loans and home equity line of credit (HELOC): These options could be an easy way to finance your green improvements if you have a significant amount of equity in your home. Both function as second mortgages, so you keep the rate and term of your existing mortgage even though they have some distinct differences. Since the value of the home will increase, there are additional tax benefits to take into account.

Cash-out refinance: This type of refinance allows you to access your equity and obtain the money you require for the improvements without having to take out two mortgages. However, do the math: The current high mortgage rates mean you will be paying more for borrowing if you currently have a mortgage with an interest rate below 4%.

Personal loans: Although they have a bad reputation because of some extremely high interest rates, the best personal loans, provided your credit is excellent, have lower rates than those of home equity loans. You also save money on interest if you feel comfortable choosing a much shorter repayment schedule.

Conclusion

Utility bills can be very expensive, especially for older homeowners. Worries can grow as extreme weather events become more frequent. You may have access to money set aside for upgrades that lower heating and cooling expenses and improve a property’s environmental friendliness with the help of an energy-efficient mortgage. Remember that you will be taking out a larger loan, so think about how long you want to live in the house and how much you can save over time.