By manybanking.com Staff
Energy Efficient Mortgages (EEMs) or “green mortgages” first originated in the early 1980s as a way to encourage homeowners to make energy-saving home improvements. In recent years, as environmental consciousness has grown, EEMs have gained popularity.
The loans allow borrowers to obtain bigger loans for energy-efficient homes or by making energy-efficient improvements. There are numerous energy-saving upgrades that qualify, including replacing windows, improving insulation, installing energy-saving heating/cooling systems and upgrading to energy-efficient appliances.
Fannie Mae’s (Stock Quote: FNM) Energy Efficient Mortgage is one of the most popular green mortgage products and is sometimes called the “conventional EEM.” However, Freddie Mac (Stock Quote: FRE), the FHA and HUD all provide standards for structuring green loans. Green mortgages can be obtained from many different lenders and they do not necessarily have to conform to underwriting standards. Energy Star offers a Partner Locator Tool to help find lenders that offer green mortgages.
Green mortgages can be obtained on both older homes that require improvements and homes that already include energy-efficient improvements (energy-smart homes). Generally, with energy-smart homes, borrowers can get approved for larger loan amounts, which is possible because energy-efficient homes will generate lower utility bills -- savings which could then be used to pay for higher monthly mortgage payments.
But, green mortgages on older homes in need of energy-efficient improvements work slightly differently. In these cases, funds for energy-efficient upgrades are incorporated in the loan amount. These funds are then held in escrow to pay for the upgrades after the loan closes.
To get a green mortgage, borrowers must get an energy audit, or a Home Energy Rating System (HERS) report. The audit will determine how a home fairs in relation to energy efficiency guidelines. Similar to home inspections, these audits are conducted by trained energy raters and usually cost a few hundred dollars. A HERS report details where energy-efficiency improvements can be made, how much those improvements might cost and how much savings could be expected.
The cost of the energy audit can usually be rolled into the loan like other closing costs. Additionally, some lenders offer discounts or rebates on closing cost for energy-efficient homes. For example, Bank of America (Stock Quote: BAC) will give borrowers up to $1,000 credit in closing fees for purchasing a new construction Energy Star qualified home through its Energy Credit Mortgage.
So where are green mortgages most common? The loans are mostly found in developments that incorporate green building construction, because builders can easily provide documentation of energy savings. With increased awareness and demand for energy savings, green financing options are gaining popularity as a marketing tool for new construction developments. These developments can also advertise significant tax savings for energy-efficient improvements.
Overall, green mortgages are a win-win situation for both borrowers and lenders. Borrowers can increase their buying power and enjoy utility savings from energy-efficient improvements while lenders can benefit from booking a larger loan. And of course, let’s not forget the environment.
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