Energy-Efficient Mortgages, Explained

Many homeowners spend thousands of dollars a year on energy bills and pay considerable amounts in monthly utility payments. Energy-efficient mortgages (EEMs) and the EEM program offer a way to help us be more eco-friendly and enjoy significant cost savings. EEMs provide a handy way for current and prospective homeowners to finance the cost of energy-efficient upgrades in both new and existing homes.

Although Rocket Mortgage^® doesn’t offer EEMs, this article will discuss the benefits as well as the alternatives.

An EEM, sometimes referred to as a green mortgage, is a financial loan product that allows you to fully pay for and finance energy-efficient improvements under favorable terms. Available in conventional, Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) mortgage formats (see below for a more in-depth explanation), EEMs provide added funds that are included as part of your home mortgage or refinancing – funds that you can apply to make energy-saving upgrades.

For example, a borrower may wish to obtain an EEM if they’re looking at purchasing an older property with an HVAC system, windows, furnace or other structural elements that could use energy-saving enhancements. Alternatively, a home buyer may wish to leverage an EEM to purchase a home that is already energy-efficient or refinance a mortgage to fund new energy-efficient improvements that lead to cost savings.

In effect, an EEM is designed to help you finance eco-friendly home upgrades or the purchase of homes that produce significant savings on your monthly utility bills by helping you go greener. Likewise, it’s also crafted to help you afford green improvements that can benefit the planet and help you reduce your overall energy consumption footprint.

From a practical standpoint, the EEM program affords you greater borrowing power by allowing your lender to extend loans that cover the cost of adding energy-saving features to new or existing homes. EEMs give lenders the opportunity to facilitate the extension of a home purchase or refinance to buyers with government-backed or conventional loans.

There are many examples of energy-saving upgrades that homeowners can finance using an EEM. Granted, not all renovation trends qualify for all loan types (for example, for a VA loan EEM, adding thermal-proofed windows is allowed under current guidelines, but giving your air-conditioning system an overhaul presently does not). However, the following are types of examples of expenses and home upgrades that you can finance with an EEM:

• Energy-efficient appliances (refrigerators, washers, dryers, etc.)
• Energy-efficient windows and panes
• Furnaces and heat pumps
• Assorted heating and cooling systems (solar, etc.)
• Weatherization treatments
• Water heaters and heater installations
• Caulking and weather stripping
• Duct system repairs and installations
• Home insulation (walls, floors, attic, etc.)
• Select roofing improvements

Several different EEM loan programs are available to home buyers, each of which comes in different forms and with different features attached.

FHA Loan EEMs

An FHA loan is a popular mortgage choice for buyers given that minimum down payments are keyed to 3.5% of the total home purchase price. The FHA will also allow you to add the cost of improvements to your loan amount if evaluations find that the total cost of these improvements is lower than the amount of energy savings to be enjoyed. Note that in addition to normal FHA loan requirements, borrowers don’t need to qualify for the portion of the home loan that is used to finance energy-efficient improvements.

Under the terms of an FHA loan, you can increase your total loan amount to include improvements by adding to your loan based on a number of variables. You’ll be required to have a home energy assessment done. Depending on the cost of the improvements listed in the assessment, the FHA will either pay those costs or 5% of the lowest value among the following options:

• The adjusted property value
• 115% of the median area price of a single-family home
• 150% of the national conforming mortgage limit

VA Loan EEMs

A VA-backed EEM is a loan offered under favorable terms to service members, veterans and qualifying spouses. As a general rule, energy-efficient improvements can total no more than $6,000 on top of the approved VA loan amount. In addition, homeowners are required to complete any energy-efficient improvements within 6 months of closing on the home.

Conventional EEMs

The terms of a conventional EEM are the most generous of all EEM loan types. Obtain one, and you can borrow the amount that you qualify for under a conventional mortgage plus up to 15% of a home’s appraised value for use on energy-efficient improvements.

Homeowners must meet several requirements in order to be approved by a qualified EEM lender. These include but are not limited to qualifying for an EEM under minimum credit requirement and documentation guidelines while ensuring that energy-efficient improvements are cost-effective. In practice, this means that the total cost of the improvements that the home buyer seeks to make will be less than the reduction in overall costs that can be enjoyed in energy savings over the expected life of these improvements.

To this extent, an energy consultant must prepare a home energy rating report that estimates potential energy savings using a Home Energy Rating System (HERS) to measure current energy-efficiency. Please note that any associated costs and expenses of the energy rating report and related inspections can be financed alongside actual energy-efficient home improvements. In other words, a lender will actually seek to calculate and compute just how much you stand to save on your utility bills by making home improvements as part of the qualification and underwriting process.

Note that aspiring borrowers must also meet the specific financial requirements associated with their individual mortgage loan type, just as they would with loans that are not technically EEMs.

EEMs are typically best suited for homeowners who look for long-term value over time. Likewise, they’re also a popular choice with buyers who want to invest in home solar panels and other cost-effective technologies. Individuals wishing to enjoy cost savings on utility bills may also wish to apply for an EEM loan.

If you decide that an EEM isn’t what you’re looking for, or you don’t qualify for one, there are other options available to assist with funding your home improvement projects.

• Cash-out refinance: You can fund your home improvement projects by taking advantage of the equity you’ve built in your home with a cash-out refinance.

• Home equity loan: Another way you can fund your home improvement projects is a home equity loan, which allows you to use the equity you’ve built in your home as collateral to borrow money.

• Personal loan: Although interest rates will likely be higher than those of home loans, a personal loan can assist you in funding any energy-efficient home improvement projects.

EEMs offer a handy way to reduce your energy bills, lower your annual expenses and minimize your household’s overall energy consumption. These financial products create more opportunities for homeowners to purchase and install energy-efficient home upgrades or give outdated home systems a much-needed overhaul.

By allowing prospective home buyers or current property owners to more easily finance green and eco-friendly solutions, EEMs offer a helpful way to lessen your household’s impact on the environment. Noting this, energy-efficient home improvements may still be a worthwhile investment for you to consider exploring, even without financing them through an EEM.

While Rocket Mortgage does not currently offer EEMs, readers who are interested in alternative types of loans can take action and start their mortgage application online today. You can also give us a call at (833) 326-6018.