If you’re budgeting to buy a home, you’re probably thinking about the main expenses: an upfront down payment and paying off your mortgage. However, your utility bills can also add a sizable chunk of cash to your monthly payment obligations. And get ready for even higher costs if you live in an area where you blast your air conditioning unit during a heat wave or crank up your furnace during sub-zero days.
A green mortgage, commonly referred to as an energy-efficient mortgage, can help get some of those costs under control. EEMs are a way for homeowners to pay for a more energy-efficient home or finance the cost of certain energy-efficient upgrades, such as solar panels and weatherization treatments.
What are green mortgages?
A green mortgage is a loan for homeowners who want to live in a property that doesn’t require a massive drain on Earth’s resources. While governments and corporations debate how to meet the needs of the planet, you can play your part as a homeowner by upgrading your older home or buying a new one that focuses on energy efficiency.
EEMs are best suited for buyers looking to invest in cost-effective technologies or to save on utility bills over the long term. Though it can often require a bigger investment, an eco-friendly property can have worthwhile benefits.
How do green mortgages work?
If you already own a home and want to refinance your home loan to borrow money for energy-efficient improvements, a green mortgage could be a good option. You can generally borrow up to 15% of your home’s appraised value.
If you don’t currently own a home, you can also use a green mortgage to buy an older home and have a contractor make the property more eco-friendly.
Alternatively, you might use a green mortgage to finance new construction that has achieved Energy Star certification, a designation making it at least 15% more energy-efficient than homes that meet the current local building code.
Before your financing is approved, you’ll usually need to pay for an energy consultant to verify that the improvements meet certain energy-efficient standards. A home energy assessment will allow the mortgage lender to approve how much you’ll save through the process.
What kind of green improvements can be financed?
If you’re considering making an eco-friendly upgrade, contact a lender to see if your plans qualify. In general, these are the types of projects that qualify for financing, according to the Department of Energy:
- New energy-efficient appliances like washers, dryers and refrigerators
- Energy-efficient windows
- Solar panels
- Furnaces, heat pumps and HVAC systems
- Weatherization treatments
- Caulking and weather stripping
- Insulation
- Duct system repairs and installations
- Some roofing projects
- Programmable thermostats
- Enhancements that protect against natural disasters such as storm surge barriers, foundation retrofitting for earthquakes and tree removal in fire zones
Types of green mortgages
There are several different options for green mortgages. In most cases, you’ll need to start or finish the work to improve the property’s energy rating within a certain time frame, so be prepared to break ground on your project shortly after you get approved.
Conventional energy-efficient mortgage
A conventional EEM is similar to a conventional mortgage, which requires at least a 3% down payment of the purchase price. However, with a conventional EEM, you’ll be able to borrow more money -- up to 15% of the as-completed value of the property -- to cover your project costs.
There are two main options available offering green mortgages: the FreddieMac GreenCHOICE Mortgage and the Fannie Mae HomeStyle Energy Mortgage.
FHA energy-efficient mortgage program
While EEMs might sound like a relatively new type of loan, the Federal Housing Administration has had an EEM program in place since 1995. If you qualify, you’ll be able to add additional funds that are less than the cost of the energy-efficient improvements or less than 5% of any of the following: the adjusted value, 115% of the median area price of a single-family dwelling or 150% of the national conforming mortgage limit.
Browse through the list of FHA-approved lenders in your area to learn more about whether your plans qualify. You only need to qualify for the cost to purchase the home, and the additional funds won’t be subject to FHA requirements.
VA energy-efficient mortgage
If you’re a service member, veteran or eligible spouse, you can also consider VA-backed EEMs, though this program isn’t quite as broad as some other EEM programs. It’s tough to get approval for upgrades that cost more than $6,000 (both the lender and the VA will need to sign off), and several projects, such as a new roof and Energy Star-rated appliances, aren’t eligible for financing.
How to qualify for a green mortgage
Qualifying for a green mortgage involves many of the same requirements that come with a traditional mortgage. Your lender will take a close look at the following:
- Your credit score: If your credit score is in great shape -- at least 620, but preferably above 700 -- you may be able to qualify for a conventional EEM. If your credit score is below 620, you’ll be better off looking at an FHA-backed EEM or a VA EEM, if you qualify.
- Your debt-to-income ratio: Lenders will look at your outstanding debts including student loans, credit cards, auto loans and any other monthly financial obligations. Generally, you’ll need a DTI lower than 45%, but even lower is better.
- Your down payment: VA-backed green mortgages are the only type of EEM that doesn’t require a down payment. For other loans, you’ll need to be able to contribute a minimum percentage of the loan amount. If you’re a first-time buyer, be sure to browse for down payment assistance options to help come up with the funds, along with the money for your closing costs.
- Your documentation of the energy improvements: This is the key requirement that sets energy-efficient mortgages apart from standard home loans. In most cases, you need to pay a professional to conduct an energy audit that verifies the work is indeed going to lower your energy usage.
Can green mortgages save me money?
Depending on the type of improvement you make using funds from a green mortgage, you may be able to save a lot of money. First consider how long you plan to stay in the home to get an accurate estimate of your savings. The longer you’re there, the more you can save.
Consider EnergySage estimates for the typical homeowner in Arizona, who pays $2,748 per year in utility bills. If that homeowner installs a solar system, they can expect to break even on those costs in around 7.5 years. After that, it’s all a positive impact on your finances.
It’s not just about the future, though. There are a variety of federal tax credits available for energy-related home upgrades that can total up to $3,200 of savings per year through 2032. If one of your primary goals is taking advantage of tax credits for energy improvements, be sure to consult a tax professional to maximize your savings.
Pros
Potential long-term savings: By investing in energy-efficient upgrades now, you can enjoy lower utility costs over the course of time you live in the home.
Your home will be more attractive when it’s time to sell: The higher a home’s energy rating, the more a buyer is willing to pay, according to research from the Department of Energy. Whenever you decide it’s time to move, you can use your energy-efficient design as a key selling point.
You’re doing your part: You can feel good about your work to reduce your carbon footprint and the role you’ll play in taking better care of the planet.
Cons
Higher upfront costs: You’re going to have to borrow more money, which means paying more interest. And some of these projects aren’t cheap. A new heat pump, for example, costs just under $17,000 according to the National Association of Realtors.
You’re going to have to deal with more work: Green mortgages come with strict requirements, which means filling out more paperwork and potentially tracking down an energy consultant to come document your project.
You won’t have quite as many options: Not all lenders offer energy-efficient mortgages, so you may not have quite as many choices to consider.
Alternatives to green mortgages
An energy-efficient mortgage isn’t your only option to upgrade an older property. You can also consider these borrowing routes, which won’t require any documentation about the energy performance of the property:
Home equity loans and HELOCs: If you have a sizable portion of equity in your property, home equity loans and HELOCs might be a simple way to finance your green enhancements. There are some unique differences between the two, but they both act as second mortgages -- meaning you maintain the rate and term of your current mortgage. There are also some tax benefits to consider since you’ll be increasing the value of the home.
Cash-out refinance: If you don’t want two mortgages, a cash-out refinance can help you tap into your equity to get the funds you need for the improvements. Do the math, though: If you’re currently enjoying a mortgage with an interest rate below 4%, today’s currently high mortgage rates mean you’ll be increasing your borrowing costs.
Personal loans: While personal loans tend to get a bad rap due to some very high interest rates, the best personal loans offer rates that are lower than home equity loans, as long as you have top-notch credit. Plus, if you’re comfortable opting for a much shorter repayment timeline, you won’t pay as much interest.
The bottom line
Utility bills can be a big burden, particularly for homeowners who live in older properties, and the rise in severe weather events can create even bigger concerns. An energy-efficient mortgage can give you access to funds designated for improvements that can reduce heating and cooling costs and make a property more ecologically friendly. Keep in mind that you’ll be borrowing more money, so consider how long you plan to be in the home and how much you’ll be able to save in the long term.