How to Get an Energy-Efficient Mortgage (EEM)

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If you decide you want an energy efficient mortgage, the first step is to find a lender who offers them. Check with your local banks, or better yet, check the list of contacts at the end of this chapter to find an agency or organization that can steer you in the right direction.

Home Energy Ratings. Once you have a lender, the next step is to get an energy rating of your house. The rating is a comprehensive evaluation of your home's energy use. It considers everything from the types and amount of windows and insulation your house has, to the major appliances (such as heating and cooling systems), to the air leakage in ducts and in the building structure itself. The analysis is not concerned with personal behavior. It shows how your house as a structural package compares to other houses, no matter who is living in it.

Home Energy Rating Systems (HERS). There are several methods for diagnosing houses. One of the most commonly accepted is the Home Energy Rating System (HERS). HERS are operating in most states throughout the country. The rating is performed by a certified rater, or energy auditor, who inputs all of the information gathered into a computer and produces a report. The report gives an overall rating for the house, scoring it from 1 to 100 points, and correspondingly, from 1 to 5 stars, with a 100 point/5 star house being the most energy efficient. In addition to rating the house's current efficiency, the report lists what energy-efficient improvements can be made and the effect on energy use that each will have. It details the estimated cost of each improvement, the estimated monthly savings, and the payback time for savings to equal costs.

In the case of loans secured by the government, $200 of the cost of the rating may be financed (as long as overall loan limits are not exceeded). Ratings currently range in cost from around $100 to $350 and average about $200.

Other Raters. Some loans require the HERS rating but others allow for alternative energy audits performed by appraisers or energy consultants. Such audits will give the same type of information to the lender. In all cases it's best to check with your lender first to know exactly what is required.

Appraisals. For loans secured through the private mortgage market (non-government loans), an appraisal is sometimes required. This will usually depend on the state you're living in. In some states, Fannie Mae and Freddie Mac now accept a HERS rating instead of an appraisal. In other states they still require an appraisal showing an increase in your home's value that's equal to the cost of the improvements. Due to the special nature of energy improvements, which bring lower utility bills and increased comfort, such an increase in appraised value is generally accepted in the industry. If you need an appraiser, be sure to find one who understands the value of energy improvements and is willing to do the extra work involved in filling out the forms required by the private mortgage industry.

Choosing Your Improvements

In order for an improvement to qualify for an EEM it must be deemed "cost-effective" (except in the case of some DVA loans). This means two things. The monthly savings on your utility bills that are generated by the improvement must be greater than the added monthly cost of the energy mortgage; and over the lifetime of the improvement, your total savings must be greater than your total costs—including maintainance costs—by at least one dollar. Cost-effectiveness is determined by the energy rating.

In some cases, an improvement that is not found to be cost-effective may be financed if all your improvements as a package pass the cost/savings test.

Getting the Loan

Once you have a home energy rating, or some other acceptable documentation, and you know what improvements you want, you're ready to apply for your loan. An energy mortgage cannot be added after the loan is granted, so be sure to apply for the EEM and your mortgage at the same time.

The process of getting an EEM is fairly straight-forward. But understanding the details, requirements, and benefits of the many different types of loans is not. At the application stage (if not before) you may want to see if there's someone in your area who can help you facilitate the process. Many HERS providers act as facilitators themselves, or can point you toward someone else who can do the job. A facilitator handles the nitty gritty details, making sure all your papers are filed on time, and easing the work for both you and your lender.

If there is not a facilitator near you, you will have to do a little extra work to make sure you have all of the up-to-date information on the different types of loans, the benefits, and the requirements for your area. The EEM industry is rapidly growing and changing, and there are many local variations to the loans. For advice, contact one or more of the organizations listed at the end of this chapter.

Doing the Work

After the loan goes through there is a limited amount of time for the energy improvements to be made, usually between 90 and 180 days depending on who is securing the loan. Money for the improvements is held by the bank in an escrow holdback account until the remodel is complete. Then it is paid to the contractor or homeowner. Since the improvements are already chosen when the loan application is made, and a contractor may be found before the loan is granted, 90 days is usually more than enough time to complete a retrofit. Most contractors will finish the job before receiving payment, so the escrow holdback does not create any problems.

Home improvement loans traditionally require that 150% of the estimated cost of the remodel be set aside by the bank in an escrow holdback account. This guards against cost overruns, but can be an inconvenience. But with most energy improvement mortgages only 100%, the actual projected cost of the remodel, is held back.

If you decide to do the work yourself, make sure you leave enough time to complete the project in the designated time frame. In the case of do-it-yourself remodels, the underwriter may only grant an energy loan for the cost of materials.

Steps to an EEM

1. Tell your lender you want an EEM when you apply for a mortgage.
2. Have a HERS rating or other energy audit done on your house.
3. Decide which cost-effective improvments you want and contract with a remodeler.
4. The lender gets the rating certificate and puts extra funds into an escrow holdback account.
5. When the loan closes, upgrades are installed and the holdback funds are released.

Excerpted with permission from No-Regrets Remodeling by Home Energy (1997)