Flex Your Mortgage Energy-Efficient Mortgages Expand Your Green Options

Last February, Dawn Webb and her husband, Floyd, bought their dream home—a 2,500-square-foot dwelling in Sacramento, California, with four bedrooms, three bathrooms and plenty of space for a growing family. But the home—built in 1989—needed an energy upgrade. So the Webbs opted for an Energy Efficient Mortgage (EEM).

Federally insured mortgage programs, the Federal Housing Administration (FHA), the Veteran’s Administration (VA), and the conventional secondary mortgage market, Fannie Mae and Freddie Mac, all sponsor EEMs. FHA EEMs are currently the most popular.

The Webb’s FHA EEM allowed them to purchase up to $10,000 worth of energy-saving measures, including a more efficient central heating and cooling system, an energy-saving water heater and less drafty windows. Though the energy-efficiency expenses are tacked onto the original mortgage, FHA EEMs do not require borrowers to qualify for additional financing because cost-effective energy improvements result in lower utility bills, making more funds available for mortgage payments.

Elise Groves, a mortgage broker who did her first EEM last October, says that the additional paperwork is well worth the hassle for people who are purchasing older homes.

“All the loans that I’m doing with an FHA, I’m absolutely pitching doing an EEM,” says Groves. “That additional money borrowed to become more energy efficient is going to cost maybe $60 to $70 a month in higher mortgage payments, but the homeowner is saving $150 a month in electricity bills.”

What’s Your Rating?

To qualify for an EEM, potential applicants must first hire a certified Home Energy Rater to inspect and evaluate the home’s energy features, prepare a home energy rating and make recommendations for improvements.

“For an EEM, you need to put together a package that looks pretty attractive from an economic standpoint that’s also not going to take too many years to pay itself off,” says Peter Waring, owner of Healthier Dwelling, a green building and energy consulting company in California.

To evaluate a building or home’s efficiency, Waring first determines how “tight” and well insulated the dwelling is by examining it from floor to ceiling for leaks and cracks. Waring then punches the data into a software program that generates a computer model of the house, revealing its efficiency rating.

To estimate a homeowner’s potential savings from upgrades, Waring must guess what the cost of electricity and natural gas will be five, 10 or 30 years from now. Though Waring’s estimates are conservative, he says that as petroleum becomes less available and gas prices skyrocket, the savings will continue to improve.

“You’re basically borrowing the money you were going to spend in the future on gas and electricity and putting it into making improvements on your house now,” he says. “So you’ve locked in what your energy needs are and also drastically reduced [your home”s] carbon emissions.”

John Shipman, president and CEO of Energy Efficiency Management, says that more than 70% of residential and nonresidential buildings predate current energy efficiency standards. In other words, the majority of U.S, buildings could use an upgrade, and fast, since building energy use is responsible for nearly 70% of electricity consumption and is the largest source of carbon emissions in the country.

“EEMs could be a great vehicle for the country to use energy efficiency and use it wisely,” says Shipman. “Our biggest offender is homes built before the energy code.” However, Shipman hopes that the current cap on FHA EEMs ($8,000 plus up to $4,000 in weatherization improvements) will eventually be eliminated because it only allows for homeowners to take small measures rather than retrofitting the entire house to be more energy efficient.

“We’re handcuffed by this cap,” says Shipman. “If we could take the existing housing stock in America and make it 50% better [with uncapped EEMs], can you imagine what that would do for the environment?”


According to the U.S. Department of Energy, EEMs give borrowers the opportunity to finance cost-effective, energy-saving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans.