an Energy Home Improvement
If you're thinking of refinancing your home to pay for your
remodel, or you want to buy a house and fix it up, you can get an
energy-efficient mortgage (EEM) to cover the costs of energy upgrades.
These mortgages let you roll the cost of those improvements into your home
loan. With a really well-designed EEM, you end up not spending a cent for
the energy measures. There are EEMs for remodeling (in some areas these
are called energy improvement mortgages, or EIMs) and others for
purchasing houses that are already considered energy efficient. The latter
allows homebuyers to qualify for more house with less income because
utility bills will be low. If you are remodeling your home with the
intention of selling it, remember energy efficiency adds value. You can
get an EEM to do the upgrades, then sell your home at a higher price to a
buyer who is taking advantage of an EEM to buy an energy-efficient home!
Who Offers EEMs?
Currently EEMs are secured by a variety of sources
including two government agencies: the Department of Housing and Urban
Development's Federal Housing Authority (FHA), and the Department of
Veterans Affairs (DVA). Also, private secondary mortgage lenders,
including the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) also offer EEMS.
Countrywide Home Loans, Inc., Norwest Mortgage, Inc., and GMAC Mortgage
Corp. are among the independent mortgage companies (they guarantee the
loan themselves rather than selling it to a secondary lender) that are
getting into the act. There are many differences between the various
loans, not the least of which is who qualifies. But the basic principles
are the same.
How EEMs Work
EEMs are added on to your regular mortgage. They allow you
to make cost-effective improvements which will save you more each month on
your utility bill than the cost they add to your monthly mortgage payment.
The government-sponsored loans have several special benefits. First, they
let you add on the money for the improvements to your mortgage even if
this means you exceed traditional loan limits. Second, you don't have to
qualify for the additional money. Third, and probably most important, 100%
of the cost of the improvements can be financed. Since all improvements
must be cost effective to qualify, this means there are no out of pocket
expenses. Your mortgage payments go up a little, but your utility bills go
down more. You can even realize a positive cash flow. It's like getting
paid for improving your home.
The private sector's secondary lenders (they buy loans from
the primary lender such as your local bank) have been slower to accept
EEMs, but this is changing. Fannie Mae and Freddie Mac are offering EEMs
in more and more states. The requirements are a bit different. For
example, these conventional lenders do not allow loan limits to be
exceeded, and they require borrowers to qualify for any additional money.
But even a private market EEM will save you money and improve your home.
And in some states there is an added benefit. Borrowers may
have the opportunity to qualify for a larger loan with a lower income
through what is called a 2% stretch of the qualifying ratios. Lenders
consider the lower utility bills you will have, and then allow you a
higher mortgage accordingly. (This is not available everywhere, but is
worth asking about.)
More Financial Options
In addition to energy mortgages, there are many other loans
available to help pay for your energy upgrades. Some are traditional home
improvement loans. Others, specifically designed for energy-efficient
retrofits, have added benefits such as lower interest rates. And for
low-income home owners, there may be loans with very low to no interest,
or other special benefits.
Loans are usually offered at the local level through
partnerships of utilities, banks, secondary lenders, and non-profit
conservation groups. There are also loans offered at the federal level,
but ultimately these are doled out locally through state agencies and
local utilities. Some loans may require a home energy rating; others do
not. Energy loans may run as low as a few hundred dollars or up into the
tens of thousands of dollars.
One useful HUD/FHA loan offered nationwide is the Title 1
home improvement loan. Homeowners may borrow up to $25,000 for general
home improvements including, but not limited to, energy upgrades.
Another is HUD's 203(k) loan to purchase a home in need of
repair or modernization. Under this program you can get one mortgage loan,
at a long-term fixed or adjustable rate, to finance both the acquisition
and the rehabilitation of the property. The local HUD field office in your
area can provide more information on these loans.
Dollar limits for energy
loans are generally lower than for traditional home improvement loans, but
so are the interest rates. Using an energy loan to supplement a home
improvement loan could help reduce overall interest rates and could help
you afford more efficient retrofits.
In the case of loans secured by the government, $200 of the
cost of the rating may be financed (as long as overall loan limits are not
exceeded). Ratings currently range in cost from around $100 to $350 and
average about $200.
Some loans require the HERS rating but others allow for alternative energy
audits performed by appraisers or energy consultants. Such audits will
give the same type of information to the lender. In all cases it's best to
check with your lender first to know exactly what is required.
For loans secured through the private mortgage market (non-government
loans), an appraisal is sometimes required. This will usually depend on
the state you're living in. In some states, Fannie Mae and Freddie Mac now
accept a HERS rating instead of an appraisal. In other states they still
require an appraisal showing an increase in your home's value that's equal
to the cost of the improvements. Due to the special nature of energy
improvements, which bring lower utility bills and increased comfort, such
an increase in appraised value is generally accepted in the industry. If
you need an appraiser, be sure to find one who understands the value of
energy improvements and is willing to do the extra work involved in
filling out the forms required by the private mortgage industry.
Choosing Your Improvements
In order for an improvement to qualify for an EEM it must
be deemed "cost-effective" (except in the case of some DVA loans). This
means two things. The monthly savings on your utility bills that are
generated by the improvement must be greater than the added monthly cost
of the energy mortgage; and over the lifetime of the improvement, your
total savings must be greater than your total costs--including
maintainance costs--by at least one dollar. Cost-effectiveness is
determined by the energy rating.
In some cases, an improvement that is not found to be
cost-effective may be financed if all your improvements as a package pass
the cost/savings test.
Getting the Loan:
Steps to an
Once you have a home energy rating, or some other
acceptable documentation, and you know what improvements you want, you're
ready to apply for your loan. An energy mortgage cannot be added after the
loan is granted, so be sure to apply for the EEM and your mortgage at the
The process of getting an EEM is fairly straight-forward.
But understanding the details, requirements, and benefits of the many
different types of loans is not. At the application stage (if not before)
you may want to see if there's someone in your area who can help you
facilitate the process. Many HERS providers act as facilitators
themselves, or can point you toward someone else who can do the job. A
facilitator handles the nitty gritty details, making sure all your papers
are filed on time, and easing the work for both you and your lender.
If there is not a facilitator near you, you will have to do
a little extra work to make sure you have all of the up-to-date
information on the different types of loans, the benefits, and the
requirements for your area. The EEM industry is rapidly growing and
changing, and there are many local variations to the loans. For advice,
contact one or more of the organizations listed at the end of this
Doing the Work
After the loan goes through there is a limited amount of
time for the energy improvements to be made, usually between 90 and 180
days depending on who is securing the loan. Money for the improvements is
held by the bank in an escrow holdback account until the remodel is
complete. Then it is paid to the contractor or homeowner. Since the
improvements are already chosen when the loan application is made, and a
contractor may be found before the loan is granted, 90 days is usually
more than enough time to complete a retrofit. Most contractors will finish
the job before receiving payment, so the escrow holdback does not create
Home improvement loans traditionally require that 150% of
the estimated cost of the remodel be set aside by the bank in an escrow
holdback account. This guards against cost overruns, but can be an
inconvenience. But with most energy improvement mortgages only 100%, the
actual projected cost of the remodel, is held back.
If you decide to do the work yourself, make sure you leave
enough time to complete the project in the designated time frame. In the
case of do-it-yourself remodels, the underwriter may only grant an energy
loan for the cost of materials.
Energy loans vary quite a bit. Here is what one might look
A local utility joins with a bank to offer energy loans
with below-market interest rates. If you are a customer of the utility you
may borrow up to $25,000 for a high-efficiency heat pump, an
energy-efficient water heater, insulation improvements, and duct repairs.
Interest rates on loans are tiered
up to $5000 @ 6%
$5000-$10,000 @ 8%
$10,000-$18,000 @ 10%
$18,000-$25,000 @ 12%.
and Debbie Brown decided to buy the house they had been renting for five
years using an EEM. They added $3,250 onto their base mortgage to cover
weatherization and other energy improvements. All the costs of the energy
improvements were paid for through the FHA mortgage, including the cost of
the energy rating, so there were no out-of-pocket expenses. The
improvements were installed as soon as the loan went through. The Brown's
mortgage increased by $21.61 a month to cover the energy upgrades. But
their utility bills dropped by over $90 a month, leaving them an extra
$720 a year. And they own a more valuable house that's comfortable year
Cost Savings with an
Compare the monthly housing costs of a remodeling EEM against
those of a standard loan, both secured through the Federal
Cost of Energy Improvements
Adjusted Purchase Price
Mortgage Loan Amount 100%
Monthly Principal Interest
Monthly Taxes and Insurance
Total Monthly Mortgage
Total Monthly Housing Expense
Benefits to the Homeowner:
$26 per month net savings
$312 per year net savings
A more comfortable, more valuable home at no extra cost
Getting the Information You Need
To find what's offered in your area, start with your local
utility. Other places to look are the field office of the federal Housing
and Urban Development (HUD) agency, your state energy office, and any
local energy conservation groups. For mortgages, try the local field
offices for the various mortgage companies and organizations listed in
this chapter or the HERS contacts listed below.
It can take a good bit of sleuthing to snoop out money for
grants and loans, and the process can be frustrating, but give it a try.
It can also pay to read the literature that comes with your utility bill,
the stuff most of us promptly throw away. Often it describes energy
financing opportunities in your area.
Take the time to call more than one of the contacts listed
as no organization is guaranteed to have all the complete and up-to-date
Berko, Robert L. Consumers Guide to Home Repair Grants
and Subsidized Loans. South Orange, NJ: Consumer Education Research
Energy Rated Homes of
12350 Industry Way, Suite 208
Anchorage, AK 99515
Home Energy Rating Systems
1511 K St., NW, Suite 600
Washington, DC 20005
Phone: 202-638-3700 ext.202
US Department of Energy
Office of BTS, EE-40
1000 Independence Ave., SW
Washington, DC 20585-0121
US Environmental Protection
ENERGY STAR Homes Program
401 M St., SW, MC 6202J
Washington, DC 20460