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EEMs or EIMs

Financing 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.

Rebates, Grants, Free Services

Utilities and the government have programs to promote energy conservation and to help people save on energy bills. Some programs are for the general public. Others are targeted specifically toward low income, elderly, and/or people with disabilities.

For years, rebates and grants for energy-efficient products were the most common ways to defray costs on energy upgrades. Currently these are declining due to government spending cuts and changes in the utility industry. Yet, in some regions, you can still find good opportunities if you take the time to look.

Here are just some of the items that may come with customer incentives in your area:

bullet Duct repairs
bullet Energy-efficient heat pumps, gas heaters, and boilers
bullet Energy-efficient light bulbs
bullet Low-flow toilets and showerheads
bullet Solar domestic hot water heaters
bullet Storm windows
bullet Water heater insulation
bullet Weatherization assistance (Sometimes only for low income people and the elderly)

Some utilities offer free or reduced-rate installation of qualified improvements. In addition, many utilities offer energy audits for free or at low rates. These are not generally accepted in obtaining an EEM, but they are very useful for learning what energy improvements your home needs.

How to Get an Energy-Efficient Mortgage (EEM)

If you decide you want an energy efficient mortgage, the first step is to find a lender who offers them. Check with your local banks, or better yet, check the list of contacts at the end of this chapter to find an agency or organization that can steer you in the right direction.

Home Energy Ratings. Once you have a lender, the next step is to get an energy rating of your house. The rating is a comprehensive evaluation of your home's energy use. It considers everything from the types and amount of windows and insulation your house has, to the major appliances (such as heating and cooling systems), to the air leakage in ducts and in the building structure itself. The analysis is not concerned with personal behavior. It shows how your house as a structural package compares to other houses, no matter who is living in it.

Home Energy Rating Systems (HERS). There are several methods for diagnosing houses. One of the most commonly accepted is the Home Energy Rating System (HERS). HERS are operating in most states throughout the country. The rating is performed by a certified rater, or energy auditor, who inputs all of the information gathered into a computer and produces a report. The report gives an overall rating for the house, scoring it from 1 to 100 points, and correspondingly, from 1 to 5 stars, with a 100 point/5 star house being the most energy efficient. In addition to rating the house's current efficiency, the report lists what energy-efficient improvements can be made and the effect on energy use that each will have. It details the estimated cost of each improvement, the estimated monthly savings, and the payback time for savings to equal costs.

A home energy rating certificate.


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.

Other Raters. 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.

Appraisals. 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 EEM



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 same time.

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 chapter.

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 any problems.

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 like:

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%.

Another example:

Mike 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 round.  

Cost Savings with an
Energy-Efficient Mortgage

Compare the monthly housing costs of a remodeling EEM against those of a standard loan, both secured through the Federal Housing Authority.

Loan-Related Expense

Standard Loan





Purchase Price



Cost of Energy Improvements



Adjusted Purchase Price



Mortgage Loan Amount 100%



Monthly Principal Interest



Monthly Taxes and Insurance



Total Monthly Mortgage



Monthly Utilities



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 information.


Berko, Robert L. Consumers Guide to Home Repair Grants and Subsidized Loans. South Orange, NJ: Consumer Education Research Center, 1996.

Energy Rated Homes of America (RESNET)
12350 Industry Way, Suite 208
Anchorage, AK 99515
Phone: 907-345-1930


Home Energy Rating Systems (HERS) Council
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
Phone: 202-586-7819


US Environmental Protection Agency
ENERGY STAR Homes Program
401 M St., SW, MC 6202J
Washington, DC 20460
Phone: 888-STAR-YES

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I believe we have reason to be hopeful for our planet.
We must follow our faiths and common sense,
which I believe will guide us into the future.
—President Jimmy Carter



 Interfaith  Power & Light
Global Warming Task Force

   Chattanooga Chapter of Tennessee InterFaith Power & Light (TN-IPL)

Tennessee InterFaith Power & Light
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