Energy Efficient Mortgages: Borrowing More to Save

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As deep, dreary winter sets in, bone-rattling cold is whistling into the cracks and crevices of homes across the country. 

We've been taping sheets of plastic to the windows in our Midwestern abode. The time of year, coupled with the fact that home-loan interest rates continue to sag at record lows, has spurred renewed consideration of a growing trend: the energy efficient mortgage, or EEM.

These unique home mortgages are helping consumers combat runaway energy prices. They're also providing significant savings over the life of a home purchase.

What Is an Energy Efficient Mortgage?

Energy efficient mortgages are available for both existing homeowners who want to make changes to their properties and for consumers looking to purchase and upgrade a home.

With an EEM, consumers can install tankless water heaters, newer HVAC units, insulation, thermal windows, and other key upgrades and finance the costs into their overall mortgage.

Unlike a second mortgage, an energy efficient mortgage is a separate loan that is ultimately rolled into overall cost of the home mortgage. These are available on conventional loans as well as on government-backed options like FHA and VA loans.

How They Work

Homeowners first need to determine whether their home qualifies for an energy efficient mortgage. The same is true for prospective homebuyers.

The process typically begins with a specialized report conducted by a home energy rating company. This document, known as a Home Energy Rating System report, or a HERS report, examines a property's current energy efficiency. Energy raters look at things like appliances, windows, insulation, utility usage, and other factors.

The professional rater will ultimately generate a rating regarding the home's energy efficiency, as well as recommendations for efficiency upgrades and how the improvements will likely affect the home's energy rating and energy utilization.

This is key information for mortgage lenders. There are different limits and allowable amounts for energy efficiency improvements depending on the loan type. Here's a quick breakdown:

• Conventional mortgages: Consumers with conventional financing can borrow up to 15% of the home's value for energy improvements. An EEM also allows you to buy more house, as lenders can increase the borrower's stated income based on the energy savings they'll reap.
   
• FHA loans: FHA borrowers can borrow up to 5% of the home value, capped at $8,000.
   
• VA loans: Veterans, service members, and surviving spouses who qualify for a VA loan can tack on $3,000 to the loan amount provided they can verify the cost of energy efficiency improvements. Veterans can borrow up to $6,000 for improvements provided those upgrades generate enough savings to offset the new, higher monthly mortgage payment.

Is an Energy Efficient Mortgage Right for You?

Deciding whether to upgrade your existing home or make improvements to one you plan to purchase can be a difficult decision. Adding a couple thousand dollars to your mortgage loan will equate to higher payments each month.

No one likes spending more money up front. But carefully consider the potential long-term benefits of those new thermal windows or that high-efficiency HVAC system.

Do some simple calculations and determine how much those energy efficiency improvements will save you each month and over the course of months and years. There's little sense in paying an additional $150 in your mortgage bill each month if those improvements aren't generating real energy savings.

But over the life of your mortgage, as the cold winters and blazing summers roll by, those energy improvements could easily translate to significant dollars saved. Crunch the numbers and consult a trusted lender.