How an Energy-Efficient Mortgage Can Save You Money

Spending money on an energy-efficient mortgage now, could save you a lot later.

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The crippling cold, coupled with a growing desire for energy efficiency, has both prospective and existing homeowners considering the merits of a “green” mortgage. These energy-efficient mortgages are a way to finance home improvements, but they can result in higher monthly mortgage payments.

Fannie Mae, the Federal Housing Administration and the Veterans Administration loan program all offer energy-efficient mortgages. These unique financing tools can help consumers rein in energy costs and realize substantial savings over the long term. Energy improvements also are increasingly valuable resale features. 

Energy-efficient mortgages aren’t without potential difficulties. You take a larger loan to cover these improvements, and capturing savings can take years. Whether an energy-efficient mortgage makes sense depends on your plans for the property and your patience. An energy-efficient mortgage allows you to finance the cost of improvements that will curb energy usage and maximize efficiency. You can finance solar panels, geothermal heating, tankless water heaters and newer heating, ventilation and air-conditioning systems.

The first step is typically paying for an energy rating report on the property. A trained examiner will assess the home’s energy efficiency and generate a score using the Home Energy Rating System index. On the HERS scale from 0 to 150, the lower the score, the more energy efficient the home.

On resale, the average home has a HERS rating of 130, according to the U.S. Department of Energy. A standard new home receives a 100 rating, meaning it’s 30 percent more efficient than an older property.

The HERS report will include specific recommendations for energy improvements and their projected monthly savings. How much you can add to your home loan will depend on a host of factors, including the type of financing you’re seeking: Options include conventional loans, Federal Housing Administration loans and Veterans Administration loans.

Conventional loans. Funding for energy improvements is usually capped at 10 percent of the appraised value of the completed property. Conventional lenders also may be able to boost your buying power by counting your energy savings as income.

Federal Housing Administration loans. Improvement costs can’t exceed 5 percent of the property’s value (not to exceed $8,000) or $4,000, whichever is greater based on appraised value.

Veterans Administration loans. Veterans can typically add up to $6,000 in energy-efficiency improvements.

Building these improvements into your home loan means you’re borrowing more money, which often means a higher monthly mortgage payment. There isn’t a second mortgage or credit line involved. For example, on a fixed-rate $200,000 mortgage at 4.75 percent, tacking on another $10,000 for energy-efficiency improvements would add about $50 to your principal and interest payment each month. The monthly energy savings should more than make up the difference. In fact, lenders will not move forward with an energy-efficient mortgage unless it will result in net cost savings. How much you save depends on the home and the type of improvements you implement.

The average homeowner spends about $2,200 annually on energy bills, according to the Department of Energy's Energy Star program. Adding insulation and improving the sealing of your home can cut total energy costs by 10 percent, according to Environmental Protection Agency estimates. Even just installing storm doors can make your home nearly 50 percent more efficient.

According to Energy Star, other potential energy savers include a programmable thermostat ($180 annual savings); replacing single-pane windows ($500 savings), solar water heaters ($140 savings) and efficient HVAC systems ($200 or more in annual savings).

In addition to generating savings, an energy-efficient mortgage also can help boost your home’s value. Homebuyers are increasingly enthralled with energy efficiency, and they’re willing to pay for it. More than two-thirds of builders and home remodelers said their customers will pay more money for green homes, according to a study released this month by McGraw Hill Construction. Eighty-one percent of onsumers say energy efficiency somewhat-to-very-much affects their homebuying decision, according to the Shelton Group.

An energy-efficient mortgage isn’t the right fit for every person and every property. Run the numbers in detail, and compare them with other financing options such as a home equity line of credit or even a low-or no-interest credit card.

But as energy costs continue to rise, an energy-efficient mortgage could make spending now to save later a sound investment, and a savvy resale strategy.

Chris Birk is the content development director for Veterans United Home Loans and author of "The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits."