Energy Efficient Mortgage (EEM) Lenders - Do They Even Exist?
Yes Victoria, there are energy efficient mortgage(EEM) lenders out there, but you can only spot them during the month of a blue moon, AND when the orbits of Venus and Vega are aligned, AND when chocolate fudge sundaes are a main entree three times a week in your diet plan.
Energy efficient mortgage lenders are not only illusive but also probably the banking industry's best-kept-secret, and most under-utilized loan vehicle. In fact, better try Gringotts Wizarding Bank first...
What IS an Energy Efficient Mortgage (EEM)?
It's a federally-backed (insured) financial loan vehicle. The backing comes from Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Veterans Administration to finance or refinance a loan for home energy improvements. It could be offered through the EPA's Energy Star program OR, it could be a non-insured loan offered by different lenders at market rates. Different energy efficient mortgage lenders will have different qualifications, requirements and terms.
How do EEMS Work?
These energy financing loans offer a short to mid-term loan (5-15 years) with fixed, lower-than-prime interest rates to help pay for energy improvements to a home that specifically cut utility costs over time.
Improvements could include insulation and duct-work upgrades, energy efficient heating and cooling equipment, appliances, hot water heaters, windows, doors, solar photovoltaic systems, wind turbines, geothermal systems, etc. BUT, the total installed costs of the upgrades MUST be less (much less) than the financial savings over the life of the upgrade.
You can combine energy improvements to work together so that they are cost effective (window replacements don't usually meet the cost/benefit criteria, but you can couple windows with air sealing and insulation to improve the savings-to-cost ratio sot that they can qualify).
Who are EEMs for?
IN THEORY everyone can benefit from energy efficiency financing whether you're buying, selling, refinancing, or remodeling a home. People considering building a new home can qualify for a better home because with lower utility expenses, you can afford a slightly larger mortgage payment.
Also, Homeowners can obtain financing to improve the efficiency of an older home. A home's superior energy efficiency is an attractive selling point on the market. In an environment of rising interest rates, this selling point may be one way to catch the interest of home buyers.
The Application Process for an EEM
Find a lender first (easier said than done). Your best bet is to contact your state's energy authority, or maybe even your public utility company, and ask if there are institutions that participate in energy efficiency financing. You can often get this type of information from the state's website. I am including a link to the Department of Housing and Urban Development's (HUD) page that allows you to search for Energy Efficient Mortgage Lenders in your area. Warning: this is the step that causes everyone to throw their hands up in the air and give up, because this information is often outdated, or inaccurate (sorry HUD, just speaking from experience.)
Next, your home needs to get a HERS (Home Energy Rating System) report, which shows how your home rates in energy usage before any upgrades, and provides a list of potential energy improvements and each one's cost/benefit analysis. Rating scores fall between 1 and 100; higher scores indicate better efficiency. The home energy inspection is done by a nationally or state-accredited home energy rating system (HERS) rater, with average costs of inspection ranging from $100-$600.
If the "said" mortgage from your lender is government-backed, you can get better terms. If you are buying a house, and know that you will max out with your mortgage beyond the ability to perform any upgrades to it, then you can bundle in an EEM into the mortgage. The logic here is that an energy-efficient house costs less money to operate, leading to more money to pay for the mortgage.
So, without needing additional qualifying, you should be able to buy more house with the same money. Borrowers may also get a larger tax deduction with an EEM because the interest on efficiency mortgage payments is tax deductible (same rules as mortgage interest). This can save more money than paying for energy improvements with a credit card, bank loan, or cash - none of which is usually tax deductible.
"Goody, where can I get one?"
Well, here is my story; for several years I searched high and low to identify a bank or lender that offers these. First, as a homeowner looking for one of these to help with my own energy upgrades; next, as an energy engineer trying to promote EEMs when I was working at an energy services company two years ago. My results: nada, zilch, bubkus.
All the loan officers or mortgage brokers I spoke with had no clue what I was talking about. AND, when calling the references provided on the web page of New York State Energy Research and Development Authority(NYSERDA) and HUD, none of the listed institutions offered EEMs as of the beginning of 2010. A few were familiar with the program and confessed that the EEM program they offered was discontinued (shockingly, it wasn't profitable enough).
In my relentless quest, I found out that most lenders may, in fact, do offer an energy efficient mortgage and not even realize it. In fact, all FHA approved lenders can offer EEMs - almost no one promotes it.
Why So Few EEM Lenders Then?
After all, the fault-rate on EEMs is lower than loans in general. (When people are forced to make a choice between paying the mortgage or utility bill, most will pay the heating bill - especially in the winter. The EEM helps avoid this dilemma by cutting bills and saving the borrower cash.)
There are several reasons why EEMs are the mythical unicorn. The main underlying issue is the lack of infrastructure to get bankers, appraisers, insurers, contractors, builders, realtors, architects, engineers, and retailers to use a standardized approach to promote and perform energy upgrades in the residential sector, and provide easy access to funding through energy efficient mortgage lenders.
Next, banks don't seem to really like this type of mortgage product, since it is not a big ticket item (loans are usually less than $30,000), and the interest rate attached to it is not that profitable in the long run.
Also, with new construction (and existing construction), energy improvements raise the appraised value of the home by at least the cost of the improvements. According to the Appraisal Journal, the value of a house increases by $25 for every dollar saved in utility bills. So $10,000 in improvements should mean at least $10,000 more in value. But this doesn't actually happen, partly because very few realtors know how to valuate energy efficiency, or how to tangibly help buyers, sellers or homeowners see the financial gains in energy upgrades. Even fewer realtors know how to market it to their advantage financially.
If you are a realtor or building professional, who wants to find out more about incorporating energy efficiency into your business, Please visit Datafaire.com. Also, did you know that there is a market-based performance program called EcoBroker that provides seminars for realtors on how to market and sell energy efficient homes?
As for the appraisal industry, it is still mostly behind the curve when incorporating the monetary value of energy efficiency. Most appraisers will appraise an Energy Star home the same as a regular home. This is all testimony to how fragmented the real estate industry is with respect to energy improvements...
www.mortgageloan.com is a site that lists some of the lenders in the different states. As I haven't checked with these lenders, I cannot vouch whether they, in fact, still provide energy efficiency mortgages. If you do contact any of the listed organizations, please of your level of success and your experience.
In theory, obtaining an energy efficient mortgage should be the closest thing to getting free money...that is, to have energy savings pay for the upgrades through a mortgage with no up-front costs to help us live within our means. And banks buy mortgages to sell them at a profit, because, well...that's what they do to make their shareholders happy.
So, dear banker, does an energy efficient mortgage not represent a better investment than a multi-sub-primed mortgage that go defunct due to people living beyond their means, and creating waste?
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