If sustainable living is an important part of your lifestyle, you might be a candidate for a “green mortgage” when purchasing your next home or refinancing your current home. A little-known lending product, the green mortgage can save you big money while helping you live a more energy-conscious lifestyle.
A “green mortgage” is another name for Energy Efficient Mortgage, a lending product that allows the home buyer to finance above the cost of the home purchase to pay for energy-efficient upgrades to the house. The Federal Housing Administration (FHA), the Veterans Administration (VA) and Federal National Mortgage Association (Fannie Mae) each offer these programs with their own incentives. The loans are secured through a private lender.
FHA allows the borrower to add 5 percent of the value of the house to the mortgage for improvements, capped at $4,000. The VA permits up to an additional $3,000 to the mortgage and up to $6,000 if the upgrades will save more in energy costs than the cost of the improvements. Fannie Mae allows borrowers 2 percent more in their debt-to-income ratio qualification.
Green mortgages with an extra 5 percent are available for new constructions homes built with energy-efficient features.
These programs can also be used for refinancing a house to include energy upgrades. A handful of states offer their own versions of these energy-efficient mortgages.
Benefits. The increased mortgage payment is offset by the monthly cost savings from energy efficiency. Also, because mortgage interest is tax deductible, a green energy mortgage saves on federal taxes, making it more efficient than other ways of borrowing or paying cash for such upgrades.
Qualifying. An existing home must be inspected by a certified home energy rater, using criteria known as the Home Energy Rating System. Find a professional here. The inspection costs about $300 and includes recommended upgrades, cost estimates, annual savings estimates and a projected life expectancy for the upgrades.
New home builders must document and certify that the home meets energy savings recommendations.
Many real estate agents and mortgage lenders aren’t aware of these programs, though the FHA has included a fact sheet about its program in loan packets for years. Lenders who are aware of them don’t always promote them because they require more paperwork and the loans are more difficult to sell on the secondary market.
Contact your state’s energy conservation offices to inquire about participating loan providers. Find the appropriate agency in your state at the website of the National Association of State Energy Officials.