From House To Home

These days, everything seems to be going “green,“ and now home mortgages are no exception.

Although many Americans have never heard of an Energy Efficient Mortgage, or EEM, this type of loan can provide borrowers with several benefits, including cost savings and increased comfort. EEMs also help the planet by encouraging homeowners to incorporate energy savings in their home and reduce their overall environmental impact. If you are purchasing a home that is ENERGY STAR® qualified, or if you are looking for a way to finance upgrades to boost your home’s current energy efficiency, then an EEM might be right for you.

What is an EEM?

An EEM gives a borrower more options when purchasing or refinancing a home that has cost-effective, energy-saving improvements. An EEM increases a homebuyer’s qualifying income and purchasing power while decreasing the amount of money spent on home energy consumption. Mortgage lenders can offer EEMs on conventional loans, FHA and VA loans, and jumbo loans.

How EEMs work

Buyers

For a typical, conventional EEM, a mortgage lender can increase a borrower’s income by a dollar amount equal to the estimated energy savings. Geoff Hall, manager of HLC Sales for Countrywide, a family member of America’s number one home loan lender*, explains, “A green loan can stretch your ‘debt-to-income’ ratio by about 2 percent, so if you are looking to purchase a new home that is already energy efficient, an EEM can help you qualify for a larger loan and a better home.“

Current homeowners

With falling interest rates, many home-owners may be considering refinancing their current loan. Refinancing with a conventional EEM enables consumers to borrow more (up to 15 percent of their existing home’s value), so they can use the extra money to make cost-effective energy improvements. (FHA and VA loans have different caps, ranging from $3,000 to $8,000.) “If you have an older home that needs attic insulation, a new water heater, furnace, or air conditioning system, an EEM can essentially help finance those upgrades for you,“ adds Hall.

If you are purchasing a home that is ENERGY STAR® qualified, or if you are looking for a way to finance upgrades to boost your home’s current energy efficiency, then an EEM might be right for you.

It’s important to note that your monthly mortgage payment will go up slightly with an EEM, but your monthly utility bills will go down, so you can expect to at least offset, if not save money, overall. Remember, too, that because the interest you pay on your home mortgage is usually tax-deductible (consult your tax advisor), you should see a slight bump in savings there as well.

Qualifying for an EEM: HERS report

All buyers who qualify for a home loan qualify for an EEM. If you want to make your existing home greener through energy retrofits, the first thing you will need to do is obtain a certified energy audit, usually a Home Energy Rating System, or HERS, report, which is similar to a miles-per-gallon rating on a car. (Not every lender requires a HERS report; some will accept other energy company audits to verify the efficiency level of a home.)

For a new home, a HERS rating provides the lender with the estimated monthly energy savings and value. For an older home needing upgrades, a HERS report evaluates and scores a home’s current efficiency level. The home rater will then make recommendations for which energy upgrades will result in savings and how much those upgrades will cost so the lender can factor them into the EEM. The fee for a HERS rating varies by state but typically runs between $100 to $400, which can be paid by the seller or even financed as part of the EEM.

Finding an EEM lender

If Energy Efficient Mortgages are good both for homeowners and the environment, then why aren’t they more popular or prolific? While EEMs have been available in all 50 states since 1995, many borrowers might still have a difficult time finding a lender who offers them. According to Mark Dukes, branch manager for Opteum Mortgage, EEMs account for just a tiny percentage of all loans processed. Part of the challenge is awareness and technology. Says Dukes, “It’s unfortunate, but many loan officers aren’t familiar with EEM solutions.“

Jeff Cole, creator of the myEnergyLoan concept, which provides aggressive closing-cost discounts for buyers of energy efficient homes, agrees. “There are a huge number of loan products in the marketplace today, and green loans just haven’t gained quite enough mainstream traction yet,“ remarks Cole. “As an incentive for people to adopt more environmentally conscious lifestyles, myEnergyLoan offers real-time value to qualified buyers of green properties today.“

*Countrywide Financial Corporation, as ranked for 2007 by Inside Mortgage Finance, January 25, 2008