Borrowing Power

Financing Energy Efficiency through "Green" Mortgages

When Caroline and Tommy Chang decided to refinance their 35-year-old home to take advantage of lower interest rates, their lender suggested financing energy improvements through their new mortgage deal as well. After having their home inspected and obtaining a green rating, they qualified for an energy-efficient mortgage (EEM), increasing the size of their loan by almost $9,000 to cover the costs of adding insulation, replacing windows and making various duct repairs.

© Elizabeth Prager

Once the loan came through and the upgrades were put in place, the Changs were living more comfortably, using less resources—and saving $230 a month. "We’re just amazed at the difference. We’ve hardly used the furnace all winter. The house is much quieter too," says Caroline Chang.

Resizing Your Footprint

Given that most of us spend as much as two-thirds of our time at home, our environmental footprints are largely determined by the efficiency of our residential heating and cooling systems and the resources we consume to keep our houses up and running. But what many homeowners don’t realize is that the benefits of improved energy efficiency extend beyond savings on utility bills and reduced resource consumption.

A movement is afoot among real estate lenders to offer special mortgage purchasing programs and incentives designed to reward energy efficiency and sustainable building and restoration. Borrowers planning to purchase new energy-efficient homes—as well as people who want green renovations on older homes—can take advantage of such programs to increase their mortgage amounts while offsetting construction and equipment costs.

Fannie Mae, the Congressionally chartered private company that works with lenders to back mortgages for low- and moderate-income Americans, is the prime mover of "green" mortgages through its EEM program. To qualify for the program, homeowners must either buy a new energy-efficient home, or commit to upgrades of an existing building as recommended by an inspector certified through the Home Energy Rating System (HERS). While HERS inspections can cost as much as $400, the projected savings from energy efficiency are considered part of the borrower’s income and can help homebuyers qualify for larger mortgages. By increasing borrowing power, the EEM allows homeowners to fold the costs of energy efficiency into the total mortgage amount.

Such factors as window efficiency, heating and cooling system efficiency, wall-to-window ratios, insulation levels, local climate and the solar orientation of the home determine a home’s HERS rating. In a home that needs energy improvements, the HERS report suggests efficiency upgrades, and estimates the cost of the improvements as well as expected energy savings. The cost of the energy improvements can be included in the homeowner’s mortgage; however, the improvements cannot exceed 15 percent of the home’s value.

A borrower with a new home can qualify for an EEM if the house was built according to guidelines set by the Energy Star Builder Option Program (BOP), a project of the U.S. Environmental Protection Agency (EPA) to encourage energy-efficient design and building. Once construction on the new home is complete, a HERS report is conducted to determine the building’s energy efficiency, which will in turn dictate the terms of the EEM. Eligible borrowers can obtain an EEM backed by Fannie Mae with only a three percent contribution, which can be funded by the borrower and through other sources such as grants or gifts.

Federal Funding

EEMs have been available in one form or another through Fannie Mae since 1979, when President Carter ordered all federal lending agencies to institute programs encouraging energy efficiency. But according to Michelle Desiderio of Fannie Mae, the program idled in relative obscurity for its first two decades as complex registration requirements and extensive paperwork hampered widespread acceptance. "We’ve made a number of changes to the program over the last three years so as to make it much less cumbersome for lenders and borrowers alike," says Desiderio. For one thing, the results of the HERS rating are now made available on a single sheet of paper, which borrowers can take with them to apply for loans. And lenders can quickly incorporate the HERS findings into a loan package they know will be backed by Fannie Mae. Borrowers can find more detailed requirements for EEM qualification on the Fannie Mae website, as well as a list of lending institutions from coast-to-coast, including Countrywide, Wachovia, SunTrust and Home First that offer the "green" mortgage packages.

Indeed, financing energy efficiency through EEMs is a win for homeowners, lenders and the environment. And it’s never been easier to get one. "It’s wonderful. It makes sense for everyone to do it," concludes Caroline Chang.

RODDY SCHEER reports on green money from Seattle.