Summary

An energy-efficient mortgage (EEM) is a special type of home loan that helps you buy a home with energy-saving features or finance upgrades that improve energy efficiency. Available as purchase or refinance loans, EEMs can cover improvements like new insulation, solar panels, or efficient HVAC systems. They come in conventional and government-backed options and may save you money through better rates and lower utility bills.

---

🏡 How to Use an Energy-Efficient Mortgage

An energy-efficient mortgage can be used in several ways: to buy or refinance a home with existing energy-efficient features, buy a home and renovate it with energy-saving upgrades, finance improvements to your current home, or pay off debt from prior energy-efficient upgrades like PACE loans. For renovations, a certified energy assessor recommends upgrades for lender approval. The Inflation Reduction Act of 2022 also provides tax credits and rebates for energy-efficient upgrades, making EEMs even more appealing when combined with those savings.

Takeaways:

• EEMs can cover new purchases, renovations, or refinancing for energy efficiency.

• Renovation upgrades require a home energy assessment.

• Tax credits may further reduce upgrade costs.

Key Terms

• EEM: Energy-Efficient Mortgage, a loan for buying or upgrading a home for better energy efficiency.

• PACE loan: Property Assessed Clean Energy loan for energy improvements repaid via property taxes.

---

💡 Energy-Efficient Mortgage Requirements

Like standard mortgages, EEMs require meeting the lender's underwriting criteria such as credit score and debt-to-income ratio. They also involve unique requirements, like a home energy assessment to determine current efficiency and recommended upgrades. New homes use the HERS rating system, while older homes often use the U.S. Department of Energy’s Home Energy Score. Some lenders may waive the assessment if upgrades cost below a set amount. The assessment considers air leaks, insulation, HVAC systems, appliances, and lighting, then issues a rating from 0 to 150, with lower scores indicating higher efficiency.

Takeaways:

• EEMs require standard mortgage approval plus an energy assessment for upgrades.

• Home energy ratings assess areas like insulation, HVAC, and air leaks.

• Assessment costs ($207-$679) can be rolled into your mortgage.

Key Terms

• HERS: Home Energy Rating System, measuring home efficiency in new builds.

• Home Energy Score: DOE rating system for existing homes.

---

🏠 Types of Energy-Efficient Mortgages

EEMs come as purchase or refinance loans. Refinance EEMs can pay off energy efficiency debt or tap home equity for upgrades. Options include conventional loans (GreenCHOICE by Freddie Mac and HomeStyle Energy by Fannie Mae), VA EEMs for veterans, and FHA EEMs for broader eligibility, including manufactured homes. GreenCHOICE allows upgrades up to $6,500 without an energy report, while HomeStyle caps that at $3,500. Conventional EEMs allow up to 15% of a home's “as complete” appraised value to be financed for upgrades. VA EEMs finance up to $6,000 in improvements, and FHA EEMs adjust qualifying ratios to help buyers afford energy-efficient homes.

Takeaways:

• EEMs include conventional, VA, and FHA options.

• GreenCHOICE and HomeStyle Energy cover up to 15% of home value in upgrades.

• VA EEMs require pairing with a VA loan and close simultaneously.

Key Terms

• GreenCHOICE: Freddie Mac’s energy-efficient mortgage program.

• HomeStyle Energy: Fannie Mae’s energy-efficient mortgage program.

• VA EEM: Energy-efficient mortgage add-on for VA loans.

• FHA EEM: FHA-backed mortgage supporting energy-efficient upgrades with flexible qualification ratios.

---

⚡ Eligible Energy-Efficient Projects

Projects financed with EEMs include HVAC systems, smart thermostats, efficient windows and doors, caulking, weather-stripping, low-flow fixtures, insulation, appliances, lighting upgrades, and renewable energy systems like solar or geothermal. Fannie Mae’s HomeStyle Energy mortgage also allows natural disaster readiness improvements such as retrofitting foundations, installing storm barriers, radon remediation, and fire safety landscaping.

Takeaways:

• EEMs finance diverse energy-efficient projects.

• Some loans also cover natural disaster readiness upgrades.

Key Terms

• HVAC: Heating, ventilation, and air conditioning systems.

• Renewable energy: Solar, wind, or geothermal systems that reduce reliance on traditional utilities.

---

🔎 Pros and Cons of Energy-Efficient Mortgages

EEMs provide advantages such as better borrowing power, potentially lower mortgage rates, reduced utility bills, improved home comfort, and increased resale value. However, they also have downsides like limited lender availability, eligibility limited to energy-efficient projects, and additional paperwork. For small projects, cash payments may be simpler.

Takeaways:

• Pros include better rates, energy savings, and improved home value.

• Cons include fewer lenders, paperwork, and project limitations.

Key Terms

• Resale value: The market price a home sells for in the future.

---

💰 Alternatives to Energy-Efficient Mortgages

If EEM limits don’t fit your needs, alternatives include renovation loans like FHA 203(k), HomeStyle, and CHOICERenovation loans, cash-out refinancing to use home equity for projects, home equity loans with fixed rates, or home equity lines of credit (HELOCs) offering flexible borrowing. Each option has different approval criteria and repayment structures, so compare them carefully to match your goals and financial situation.

Takeaways:

• Alternatives include renovation loans, cash-out refinance, home equity loans, and HELOCs.

• Consider project scope, borrowing limits, and approval requirements before choosing.

Key Terms

• HELOC: Home Equity Line of Credit, a revolving credit line based on home equity.

---

Conclusion

Energy-efficient mortgages can help you finance a home that saves money and energy in the long run. While they require assessments and may have eligibility restrictions, their benefits include potential utility bill savings, improved home comfort, and increased resale value. Explore EEM options alongside traditional renovation loans or equity products to find the best fit for your goals.