Mortgages have come a long way in the past few years. There are now many different types of mortgage products available, each designed to meet the needs of different borrowers. One of the newer, and lesser-known, product types is the Green Mortgage, which is designed to encourage and help borrowers reduce the environmental impact of their homes.
Green Mortgages are also referred to as Energy-Efficient Mortgages (EEM).
These home loans specifically provide supplemental funds that can go towards sustainable and energy-efficient upgrades that will help homeowners save money in the long-term from improved energy efficiency. These improvements will increase home valuations, as well, as demand for eco-friendly efficient homes are expected to grow for many years to come.
If you’re interested in getting a green mortgage, here’s what you need to know.
Table of Contents
- What is a Green Mortgage and How Does It Work?
- Types of Green Mortgages
- Benefits of a Green Mortgage
- How to Get a Green Mortgage
- Most Common Green Mortgage Approved Home Improvement Projects
- Challenges of Green Mortgages
- Green Mortgage Resources
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What is a Green mortgage and How Does It Work?
A green mortgage is a loan that is used to finance energy-efficient, environmentally friendly home improvements. These loans often come with favorable terms and conditions that make them more attractive to borrowers than traditional home loans.
For example, green mortgages may offer lower interest rates, longer repayment periods, lower down payments or higher loan limits. Additionally, some lenders may offer special incentives for borrowers who agree to use their loan for green purposes. For example, borrowers might be able to earn rebates or tax breaks for making energy-efficient upgrades to their home. As a result, green mortgages can be an excellent way to finance energy-efficient home improvements and make your home more eco-friendly.
Types of Green Mortgages
There are several types of green mortgages available, also referred to as Energy-Efficient Mortgages (EEM), including:
- Conventional (AKA Traditional)
- FHA: Federal Housing Administration (US Government Backed Mortgages)
- VA: Veteran’s Administration
Conventional (AKA Traditional)
The terms of a conventional green mortgage are considered to be the most generous of all green/EEM loan types. The prevailing rule is that you can borrow the amount for which you qualify under a conventional mortgage, plus up to an additional 15% of your home’s appraised value to be applied towards energy-efficient improvements.
FHA: Federal Housing Administration (US Government Backed Mortgages)
The FHA, part of the US Department of Housing and Urban Development (HUD), offers government-backed, insured loans that are risk-free to private lenders. This means that if any borrower defaults on an FHA mortgage, the lending bank will be reimbursed by the Federal Government.
FHA also require lower down payments than traditional mortgages, making FHA mortgages ideal for first-time homebuyers.
This type of mortgage increases the amount you can borrow above the purchase price to help cover energy-based improvements. You must be able to qualify for a mortgage for the purchase price, and the total cost of the improvements must be less than the energy saved over the lifetime of the product.
Freddie Mac GreenCHOICE Mortgages: A Solution for Energy Efficient Home Improvements
VA: Veteran’s Administration
The Veteran’s Administration’s green mortgage program is referred to as VA Energy Efficient Mortgage (EEM). With a VA EEM loan, you will be required to provide an energy audit of the property, known as a Home Energy Rating System (HERS) report. This loan is available for military personnel, reservists and veterans only. This program currently allows you to borrow up to an additional $6,000 for energy efficient upgrades, if the projected energy savings exceed this amount, or $3,000 based solely on the documented cost of the improvements themselves.
For more details on the VA EEM program, we recommend reading The Mortgage Report’s comprehensive VA EEM guide.
Benefits of a Green Mortgage
With green mortgages rewarding borrowers for making energy-efficient improvements to their property, not only can they help to save money on utility bills, but they’ll also be good for the environment. No matter how you view the benefits of green mortgages, they are impressive, including:
- Lower Mortgage Interest Rate
- Lower Financing Costs for Energy Efficiency Improvements
- Lower FICO score and Lower Down Payment for HUD Applicants
- Reduced Energy Costs Post Completion of Home Improvements
A green mortgage typically comes with a lower interest rate than a traditional home loan, making it an attractive option for borrowers who are looking to save money. As more and more people become interested in sustainability, green mortgages are also becoming an increasingly popular option for financing sustainable home improvements.
When comparing financing options for major home improvements, a green mortgage can be a significantly more cost-effective way to cover energy-efficient upgrades than personal loans or credit cards, for example.
A Virtuous Cycle of Benefits
When considering the advantages of a green mortgage, we recommend looking at the associated benefits as a virtuous cycle, similar in spirit as the power of compounding interest. For example:
- A green mortgage can lower costs immediately with a lower interest rate
- Green mortgage funded home improvements will further increase cost-savings through reduced on-going energy costs
- Green mortgage funded home improvements will also reduce on-going maintenance costs thorough improved overall home performance
- The improved overall home performance will be reflected in higher home valuations compared to a home’s competitive set of available homes
We also envision that this virtuous cycle of benefits will also positively impact mortgage lenders, as we expect the data will prove out that loans for energy-efficient homes will be less risky, as these home values will outpace their comparable sets. As awareness of green mortgages grows, lenders with the best green programs will win more business from traditional lending programs.
How to Get a Green Mortgage
There are a number of different ways to qualify for a green mortgage, but most lenders will require that the property meets certain standards for energy efficiency. If you’re interested in learning more about green mortgages, there are a few things you can do to get started.
First, check with your local banks and credit unions to see if they offer any green mortgage products. You can also search online for lenders who specialize in green mortgages. When you’re ready to start shopping for a loan, be sure to compare offers from several different lenders to find the best deal.
Green mortgages can be a good idea if you’re keen to create your own eco-friendly home. However, as with any financial products, you should take professional advice and understand what you’re committing to before you sign.
Most Common Green Mortage Approved Home Improvement Projects
Though specifics of approved energy efficiency projects will vary by green mortgage program, here is summary of projects and upgrades that are most often covered:
- Energy-Efficient Appliances (refrigerators, washers, dryers, etc.)
- Energy-Efficient Windows, Panes and Doors
- Weatherization Treatments
- Home Insulation (ceiling, walls, floors, attic, etc.)
- Duct System Repairs and Installations
- Solar Panels
- Solar Water Heater
- Furnaces and Heat Pumps
- Water Heaters
We also recommend discovering sustainability trends and perspectives from outside of the US, such as from this comprehensive guide on Green and Eco-Friendly Renovations for Homeowners from the UK.
Challenges of Green Mortgages
Green Mortgages typically have stipulations that the borrower must meet specific requirements in order to meet the intent of the loan, such as: approved improvement project types; hiring certified installers and contractors; and using materials and processes that meet green standards.
The application process of a Green Mortgage is also more involved and a bit more complex than standard mortgages, given the requirements to adhere to green improvements. For example, a green mortgage application process will require a home energy audit be conducted by a professional, with a Home Energy Rating System (HERS) report as the outcome. These audits help assess the current energy-efficiency of a given home and the potential for enhancements and future cost-savings.
This efficiency audit is vital for the lending institution to assess if the total cost of any proposed improvements will be less than the total estimated savings in energy costs over the expected life of these improvements.
Another challenge pertaining to green mortgages is the need to spread awareness to the overall mortgage industry. We empirically know that in the US there is a lack of consumer awareness surrounding green mortgage programs. However, we are quite optimistic that if the mortgage industry focuses on the following value proposition that adoption from consumers will quickly escalate:
Green mortgages can enable homeowners – who wish to reduce their energy bills but can’t afford the initial outlay – make their homes energy-efficient.
Green Mortgage Resources
- HUD Energy Efficient Mortgage Homeowner Guide
- HUD Lender Searchable Directory
- EnergyStar Builders, Developers, Energy Rating Companies, and Incentives in Your Area
- HUD: Energy Efficient Mortgages (EEM)
- Freddie Mac GreenCHOICE Mortgages®
- MoneyGeek: Guide to Green Mortgages: Requirements, Loan Types & More
- IRS Tax Website: An Explanation on Residential Energy Credits
- US Department of Energy: Property Assessed Clean Energy Programs (PACE)
- Residential PACE Programs
- Updated Guidelines for Residential PACE Financing Programs
- Joro: How to Take Advantage of Green Mortgages, Loans, and Home Insurance
- Investopedia: What Is a Federal Housing Administration (FHA) Loan?
This article was written with Elisha Adams, a guest contributor. Elisha is a freelance writer and digital content consultant based in London who covers emerging topics related to Sustainable Living.
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