Have You Heard of an Energy-Efficient Mortgage?
By Teresa Ambord
If you’re in the market for a mortgage (or want to refinance a mortgage) and… you like the idea of having an energy-efficient home, here’s an idea: check into an EEM, that is, an energy-efficient mortgage. This is a loan that takes into account the energy savings features of a home, allowing the homeowner to qualify for a larger amount than would otherwise be possible. There are two options for EEMs.
Many brand news homes are built to energy-efficient specifications, and many older homes have been upgraded to meet the standards. So whether you are buying an existing house that is energy-efficient, buying or building a house with the intention of making it energy-efficient, or refinancing your mortgage in order to add energy-efficient features, you may qualify for an EEM. Whichever path you choose, you stretch your buying power.
Here’s how it works:
Generally, lenders want to see a debt-to-income ratio of no more than 28 percent. This means that no more than 28 percent of your monthly income can be allocated to paying the mortgage, plus taxes and insurance.
So, for example, if your monthly income is $3,000, you will qualify for a house that can be purchased with a monthly payment of $840 ($3,000 x 28%).
This is fairly standard.
With an EEM, however, lenders will allow a debt-to-income ratio of 30%. So with the same $3,000 income you qualify for a house with a monthly payment of $900 ($3,000 x 30%). That means, of course, that you can buy more house. How much more house? By going to the government Web site below, you can see an example and get more information.
Assuming you plan to finance 90% of the home, a payment of $840 per month would buy you a house with an appraised value of $132,900. For a monthly payment of $900, you could buy a house appraised at $142,400, a difference in value of $9,500. Not only are you buying more house… you are buying (or refinancing) one that will cost you less in utilities and be more comfortable during heating and cooling seasons.
If you are refinancing, your loan can be increased to an amount sufficient to cover the energy upgrades.
How do you qualify?
First your house must have a home energy rating system report (HERS). A HERS report has been likened to checking the mileage per gallon rating on your car. A trained Energy Rater comes to your home and evaluates its energy efficiency, based on insulation, appliances, windows, the climate in your area, and the utility rates in effect. Based on these factors, your home gets a rating. Scores range between 1 and 100, a higher score indicating greater efficiency.
Along with the score you get a list of recommended upgrades that will save more money that they cost to install, an analysis of your annual savings, an estimate of the life of the upgrades, and a comparison of the total energy costs per year before and after the upgrades.
There is a fee for a HERS inspection, somewhere between $100 and $300. If you are buying a home, the seller might be motivated to pay for the HERS as a selling point. Or, if paying upfront for the report is a problem, you may be able to fold it into the mortgage.
If this sounds interesting, ask your lender if they handle EEMs. Or log onto the government Web site to find out more information.
