Save Money (and the Planet): An Energy Efficient Mortgage, Explained

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Are you a buyer with your eyes on a charming older house or a bargain fixer-upper?

As you’re researching what it will take to buy the property, you’ll likely come across some hefty costs for updates to replace the outdated furnace and drafty single-pane windows. And that might leave you thinking you can’t afford the home after all—especially if those costs come on top of making your mortgage payments.

Well, hang on. We’ve got some good news on a type of mortgage you probably never heard of.

An Energy Efficient Mortgage, or EEM, allows you to make energy upgrades to your home and roll those costs into your mortgage loan. Here’s what you need to know to determine if an EEM is right for you.

What is an Energy Efficient Mortgage?

An EEM, also known as a green mortgage, allows homebuyers to purchase (or homeowners to refinance) homes that meet specific efficiency standards. The cost of the energy upgrades then gets included in the financing of the mortgages.

And even though EEM has been around for a long time, few homebuyers know it exists.

“They’re not talked about much in the industry, but these loans are great for energy-efficient upgrades,” says Curtis Wood, founder and CEO of Bee, a mortgage app.

EEMs are offered through the Federal Housing Administration, the U.S. Department of Veterans Affairs, and conventional loans via approved lenders. The maximum amount of money that can be wrapped into your mortgage depends on your loan type and how much you’ll save on utilities with the upgrades.

How do you qualify for an EEM?

An EEM requires a bit more legwork than a traditional mortgage. Borrowers first need to qualify for a loan and then get a professional home energy audit to determine whether the improvements are cost-effective.

Energy auditors use the Home Energy Rating System, a nationally recognized system for inspecting and measuring a home’s energy performance. The HERS scoring scale runs from 0 to 150. The lower the number, the more energy-efficient the home is. So for example, a score of 100 represents a standard home; a home rated at 70 is 30% more energy-efficient than a typical home.

Auditors assess which improvements would reduce energy consumption and estimate how much the upgrades save monthly.

Once the energy auditor makes recommendations, it’s up to the lender—not the homebuyer—to decide which upgrades will make the cut.

“The financed portion of the cost of the energy-efficient improvements must be less than the value of the energy saved over the estimated useful life of the improvements,” says Nicole Rueth, senior vice president at The Rueth Team in Denver.

Note that an audit typically ranges from $300 to $800. That cost can be added to the loan, or the borrower can pay out of pocket.

What types of energy-efficient improvements are allowed?

In a nutshell, the upgrades must be cost-effective and greatly improve energy efficiency.

“So think of improvements such as high-efficiency doors and windows, new furnaces or water heaters, insulation, solar panels, or energy-efficient appliances,” says Wood.

The FHA, VA, and other approved lenders each have their specific guidelines. But some other standard energy-efficient upgrades include replacing a cooling system and integrating solar, geothermal, and wind technologies. You can also generally add in fixing or replacing a chimney and installing smart thermostats.

How much money can be rolled into an EEM?

Each type of EEM has limits for the value of energy-saving upgrades that can be added to the base loan amount of the mortgage.

Here’s a brief breakdown of each:

Conventional: Freddie Mac and Fannie Mae allow you to borrow as much as 15% of the home’s appraised loan-to-value to make energy-efficient improvements. Once you close on this loan, you’ll have 180 days to complete the upgrades. FHA: Borrowers can finance up to 5% of the property value (capped at $8,000), 115% of the median price of single-family dwellings in your area, or 150% of the conforming Freddie Mac limit. The upgrades must be completed within 90 days of mortgage closing. VA: Typically, there is a limit of $6,000 for energy efficiency improvements on top of the VA loan for a home purchase or refinance. The VA criteria focus is on more permanent energy upgrades, so things like appliances or vinyl siding won’t fit the bill. The new energy upgrades must be completed within six months of closing.

Is an EEM worth it?

Whether or not an EEM is worth the extra effort all comes down to how much it will benefit you, your bottom line, and the environment.

An EEM requires a professional energy assessment, which comes with an added cost. Plus, you’ll spend some extra time during the underwriting process before loan approval.

But in the pro column, you could qualify for a larger loan amount, which will help you afford upgrades to your property. And if done right, you’ll save money on your utility bills in the long run. Another bonus: If you ever sell, having an energy-efficient home increases your home’s potential resale value.

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