Energy Efficient Mortgage Financing
Energy Efficient Mortgages (EEMs) can be a great way to finance your next Charlotte green home purchase. Generally speaking, the advantages of EEMs over conventional mortgage products will either be that it allows a “stretch” of your debt/income ratio allowing you finance a more expensive home or allows you to borrow the money for energy-efficient upgrades to an existing home. The future utility bill savings are the key to these financing products.
There are basically three types of EEMS: the conventional EEM, the FHA EEM, and the VA EEM. In order to qualify for these mortgages, the energy efficiency of the home you are purchasing must be established. This is done though a home energy rating (HERS) report performed by a certified energy rating professional.
Once you find a new construction home you would like to purchase, or decide you would like to make energy efficient improvements to an existing home, notify your preferred lender. They will obtain a HERS for the home either from the builder or from an energy rater they work with. The HERS report rates several categories from 1-100, with higher scores meaning the home is more efficient. Categories that are considered include an overall score for the home, recommend cost effective upgrades, estimated costs and annual savings of upgrades, and an estimated annual total energy cost for the home, before and after the upgrades are made. A cost effective upgrade is one that will save the home owner more money through energy savings than it will cost to install. If the report follows US Department of Energy recommendations, it may also include a star rating system from one to five plus for the overall rating of the home.
Once you and your lender have established that the home qualifies for an EEM, you will need to discuss which type is right for you. The conventional EEM can be offered by any lender that sells their loans to Fannie Mae or Freddie Mac. The lender takes your HERS report and looks at the estimated amount of money you will save by making the energy efficient changes to your home. This amount is then added onto the value of your loan. For example, if you would normally qualify for a $150,000 Fannie Mae loan and you have a HERS report conducted that says you will save $5,000 a year by making energy improvements to your home, your EEM will be $155,000.
FHA, or Federal Housing Administration, loan calculations are a little different. In this case, instead of looking at estimated money saved by making energy efficient changes, the FHA takes into account the estimated cost of implementing the cost efficient improvements on your HERS report. Up to 100% of this cost can then be added to your loan, up to $4,000 or 5% of the value of your home (up to $8,000), whichever is greater. So for example, if you qualify for a mortgage of $150,000, the estimated cost of making improvements is 5% of your home's value which is $7,500, you would qualify for $7,500 to be added to your loan.
A VA, or Veteran's Administration, EEM is only available to qualified member of the military, and can be applied to the purchasing of a new home or updating your existing home. A VA EEM can is capped between $3,000 or $6,000 depending on the improvements, and as with the other types of EEMs, a HERS report must first be completed.
Once you and your lender have decided on they type and amount of your EEM, you have closed on the house and moved in, you must make the cost efficient changes indicated on your HERS report to receive the extra funds that you qualified for using your energy efficient mortgage.
Essentially, energy efficient mortgages save you money because although your loan amount increases, after the energy efficient changes are made, the additional amount of your loan payments will be less than the amount saved on energy costs. So, let's say an energy efficient mortgage payment costs you an extra $20 a month as opposed to a traditional mortgage, but because your home is now energy efficient, your energy bills have dropped from $200 a month to $100 a month, a savings of $100. That means even with the larger loan payment, you are still saving $80 a month!
Energy efficient mortgages are a great idea – for you and the environment. They can help you save money, and you will be saving resources, all while getting one step closer to purchasing the Charlotte home of your dreams!