Understanding Energy Efficient Mortgages

By Keith Loria

Green features are all the rage today among homebuyers who are looking to lessen their carbon footprint and adhere to a more environmentally friendly lifestyle. Thanks to the Federal Housing Association’s Energy Efficient Mortgage program, homebuyers can add energy efficient features to a house they buy as part of their FHA insured home purchase.

That means that renovating or upgrading your new home to make it more energy efficient won’t be financially out of reach.

Congress first mandated a pilot demonstration of EEMs in five states more than 20 years ago and although it wasn’t a popular program, it did prove to be successful and by 1995, it became a national program. Still, even in a more environmentally friendly 2012, many people are unfamiliar with what these mortgages do.

FHA EEMs provide mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The borrower does not have to qualify for the additional money and does not make a down payment on it.

This “green mortgage” results in a more environmentally friendly living space that uses fewer resources for heating and cooling and has dramatically lower utility costs. The program covers energy efficient upgrades such as the addition of double paned windows, tankless water heaters, modern HVAC systems, the addition of Energy Star appliances and new insulation.

According to data released by the U.S. Department of Energy, 60 percent of all homes in the U.S. are not properly insulated. Updating a home’s insulation can save a homeowner up to 20 percent on heating and cooling costs or up to 10 percent of your total yearly energy bill.

In addition, energy loss from outdated windows accounts for nearly 25 percent of the annual heating and cooling costs for the average American home. Therefore, replacing windows can go a long way toward saving money. In houses with central air and heating, about 20 percent of the air is lost due to faulty, outdated duct work.

Although EEMs are created separately from your primary mortgage, they won’t be considered a second mortgage as they will ultimately be rolled into your primary mortgage.

The FHA requires that you make at least a 3.5 percent cash investment on the property, based on the sale price, and all work must begin within 90 days of closing. The total amount of your mortgage is based on the value of your home plus the projected cost of energy-efficient improvements.

There’s also the Veteran’s Administration EEM, which is available to qualified military personnel, reservists and veterans for energy improvements when purchasing an existing home. The VA EEM caps energy improvements at $3,000 to $6,000.

An EEM mortgage enables a homeowner to make older homes more comfortable and affordable with lower utility payments, plus it lessens the amount of energy needed to maintain the temperature in the home and, therefore, lessens one’s carbon footprint.

To learn more about energy efficient mortgages, contact our office today.

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