One of the newest mortgage products available these days is called an EEM or Energy Efficient Mortgage. Energy Efficient Mortgages are mortgages that are designed to encourage people to buy new energy-efficient homes or to buy homes that have energy-efficient improvements by crediting for the energy-saving measures in the home. In other words, an EEM will allow a buyer to qualify for a higher mortgage amount than he or she might normally be able to afford
An EEM (Energy Efficient Mortgage) can help you save money and buy a better home.
The whole idea behind an EEM is to promote the purchase of energy-efficient new homes and to help people afford to buy older homes with energy-efficient improvements. Obviously, the more energy-efficient homes that are sold the less energy will be used. Energy Efficient Mortgages can be used for most common “green” home improvements such as upgrading heating and cooling systems, installing solar panels, increasing insulation and replacing old windows and doors with more energy-efficient options.
Advantages of an EEM
Both home buyers and home sellers ultimately gain something due to this new type of mortgage. Homebuyers get a larger, more comfortable and more energy-efficient home than they might otherwise qualify for. Their home will continue to save them money over in reduced energy bills over the years of ownership and when it is time to sell the home there will likely be more equity built up in it than in a less energy-efficient home.
Saving energy and money on utilities is not a trend that is likely to change anytime soon. Home sellers will find that it will also be easier to sell their home and may set their home apart from the high inventory of houses that are for sale right now.
How To Get an Energy Efficient Mortgage
Energy-efficient mortgages are available through private or government mortgage companies and there are various ways a home can quality. The home will usually have to be inspected for energy efficiency or be build as an ENERGY STAR qualified home. The rating will provide you with an Energy Savings Value which should tell you approximately how much energy, and therefore money, your home can save. The higher the home’s Energy Savings Value, the more money a homeowner is allowed to borrow. This rating system is called a HERS report.
HERS (Home Energy Rating System)
The purpose of a HERS report is to quantify the amount of energy your home is able to save due to the upgrades or additions it has. The HERS report will tell you approximately how much money you’ll save in energy costs per year and over the lifetime of ownership for the home. This report will be used by the bank or mortgage company to help determine how much more money you can borrow as part of your home loan.
Some upgrades an energy-efficient home may have:
- Increased insulation in attics, crawl spaces or walls.
- Energy efficient windows and doors.
- High efficiency heating or cooling system.
- Solar panels or other forms of alternative energy generation.
How an Energy Efficient Mortgage Works
Yes, this seems a little confusing at first. Let’s say you qualify for a $200,000 mortgage, but you find a great energy-efficient home for sale for $240,000. If the home has a high enough Energy Savings Value or is ENERGY STAR rated then the bank may be able to extend you the extra $40,000 credit needed for you to purchase the home. The savings you experienced every month would be so great that the bank could essentially consider them to be part of your income.
By increasing your income on paper the lender is allowed to give you more money because your income to expense ratio would be increased. It would still be a single home loan and a single mortgage, but the amount would be higher than you would normally qualify for.
Banks that sell their home loans and mortgages to Fannie Mae or Freddie Mac are usually the ones who offer Energy Efficient Mortgages because they are quasi-governmental agencies that are tasked with increase homeownership and, at the same time, being asked to help to reduce our country’s energy usage. They can usually be 15-year fixed or 30-year fixed mortgages. That’s how a conventional Energy Efficient Mortgage works, but there are also other varieties such as the FHA Energy Efficient Mortgage and the VA Energy Efficient Mortgage.
FHA Energy Efficient Mortgage
Similar to other items, this Energy Efficient Mortgage is backed by the Federal Housing Administration (FHA) and has some additional rules and regulations that must be followed. An FHA Energy Efficient Mortgage’s loan amount can be affected by the various home improvements planned for a home.
There are some rules for how much money can be allotted as part of the FHA EEM and that value can be based on the value of the property, 115% of the median area price for a single home or 150% of the Freddie Mac limit. You’ll want to talk to your mortgage lender for more details.
VA Energy Efficient Mortgage
There is also a VA EEM that can be applied for by military personnel, reservists and veterans. The loan is used for energy home improvements and ranges from $3,000 to $6,000. The Department of Veteran’s Affairs can offer more information if you’re qualified.
Energy Efficient Tax Credit
While an energy-efficient home can save you lots of money in your year-end taxes, you won’t get those tax savings directly from an EEM. Instead, you’ll want to consider trying to get tax credits and tax deductions from energy-efficient home improvements that you’ve done over the years. That being said, an EEM is just like a regular mortgage where the interest you pay on the mortgage will generally serve as a deduction on your federal income taxes.
To find out if you or the home you’re looking to buy qualifies for an Energy-Efficient Mortgage then you’ll want to speak to your housing lender or mortgage company. Most homes that are sold or qualify as being energy efficient under this program will be advertised as being ENERGY STAR qualified or at least eligible for EEM credit.