Improve Your Home – and Save Taxes – with a “Green Mortgage”

A green mortgage can help consumers pay for improved energy-efficiency in their homes. © SIGNTIME - Fotolia.com

Energy-efficient mortgages (EEM), also known colloquially as green mortgages, are still relatively unknown among homeowners. Perhaps it’s due to a lack of information, or perhaps even due to mismanaged marketing, but green mortgages, started by the Federal Housing Administration in 1995, are a great way to improve one’s home, finances, and health.

Few homeowners know that energy-efficiency upgrades can get them tax credits. Fewer know that with an energy-efficient home, they lessen their carbon footprint and contribute more to making their communities sustainable. An EEM makes both of these possible.

The New York Times reports that less than one percent of all mortgage loans are green mortgages, quoting industry stakeholders. Over the past few years, more and more people are getting concerned about the energy performance of their homes. Environmentalists and industry stakeholders alike hope that green mortgages increase to prop up the already weak mortgage market.

What’s Covered by an EEM?

An energy-efficient mortgage is a loan homeowners take out to improve the energy efficiency of their homes. Proceeds from these loans can be used to purchase upgrades such as double-paned windows, geothermal water heaters, modern HVAC systems, radiant heat barriers, and improved insulation. Even the installation of solar roof panels can be financed with a green mortgage.

The Department of Housing and Urban Development (HUD) website states that an EEM “means comfort and savings.” An energy-efficient home benefits from lower maintenance costs and additional savings on energy costs, giving the homeowner additional cash derived from lower utility bills. This extra cash can be used for housing expenses. The HUD argues that if homeowners have more cash, then they have more purchasing power to acquire a better, newer, and more comfortable home.

On the Rise

In its Environmental Certification Report released February 2010, Greenworks Realty reports that the uptake of environmentally certified new homes in Seattle were increasing, selling faster and getting more share of the realty market. Greenworks Realty, founded in 2002 as the first full-service real estate brokerage based in the U.S. to focus on the green real estate market, based their data on the Northwest Multiple Listing Service (NWLS).

Melissa Tracey, writing for REALTOR Magazine, cites the Greenworks Realty report along with a report by the Earth Advantage Institute. The institute’s report culls data from the Regional Multiple Listing Service of Portland, where the same thing happened: The uptake of environmentally certified homes — new and existing — increased.

The U.S. government is very aggressive in promoting energy efficiency among homeowners. The website of the US Department of Energy is a rich trove of information for saving money and energy at home. The site posts information about rebates for Energy Star-certified appliances and even instructions for conducting one’s own energy assessment.

The site also offers a downloadable PDF containing energy-saving tips. In it, you’ll find relevant and vital information about energy efficiency, as well as data showing how much an average American household spends on heating and cooling alone.

The HERS Report

Filing for an EEM is a positive option, considering the rising costs of fuel and maintenance. But how does one get an EEM?

One of the requirements of an EEM is a Home Energy Rating System (HERS) report, written by a licensed Energy Rater.

Akin to the mileage rating of a car, the HERS report evaluates an individual home’s energy efficiency. A licensed Energy Rater, either hired by the buyer, seller, lender, or the real estate agent, inspects the home and factors in insulation, appliances, window types, local climate, and utility rates to create a report covering the following:

• Overall Rating Index (ORI) of the house
• Recommended energy-efficiency upgrades
• Cost estimates, projected annual savings, and life expectancy of upgrades
• Improved Rating Index (IRI) after the upgrades
• An estimate of the annual total energy cost of the home before and after the upgrades

The HERS report also includes how much money can be spent in upgrading the energy efficiency of a property.

Advantages of Green Mortgages

Homeowners who have green mortgages get to qualify for larger loans for better properties. With regular mortgages, homeowners can only qualify for a maximum allowable monthly payment of 29% of their total monthly income. Compare this to the maximum allowable monthly payment for a green mortgage: up to 33% of their total monthly income.

The savings incurred from lower utility expenses begins on Day One, as the installed features — such as geothermal water heaters and improved insulation — use less energy. Other energy-efficiency measures, such as radiant heat barriers and double-paned windows, increase the occupants’ comfort.

The resale value of the home itself increases once it is environmentally certified, as it has both improved comfort and energy-saving features. Owners of existing homes obviously benefit from an EEM, since they are increasing the resale value of their existing property and, at the same time, saving money instead of using it for maintenance and improvements.

An EEM is not a loan made separately; it goes in combination either with your existing mortgage or in applying for a new mortgage loan. If an individual homeowner qualifies for a regular mortgage, then automatically he/she qualifies for a green mortgage. The payment for the green mortgage and the regular (or refinanced) mortgage is combined, so a borrower needs to only make a single mortgage payment every month.

Pick the EEM Just for You

There are three types of green mortgages. So far, all green mortgages have been designed for individual homeowners; no commercial version of an EEM exists for small and large businesses. Lenders offer the following types:

• Conventional EEMs are guaranteed by Fannie Mae and Freddie Mac. Borrowers who are applying for conventional EEMs can get as much as 15% of their home’s appraised value.
• FHA EEMs are not as flexible as conventional EEMs, but FHA EEM borrowers benefit from FHA financing. Home owners can borrow up to 5% of a home’s appraised value, but not more than $8,000.
• VA EEMs are for current and former military personnel. These EEMs allow borrowers to get up to $6,000 for upgrades when buying an existing home. A VA EEM does not factor in the appraised value of the prospective property.

Sustainability as an Issue

Sustainability has definitely become one of the factors in the increasing interest in green homes. The past years have seen spikes in fuel prices and rising costs of energy. The current economic downturn has also affected interest in new homes, with an increased number of mortgages going underwater.

Energy efficiency does more than lessen utility bills; an environmentally certified home is also a healthy home. Improved insulation and modern HVAC systems lessen exposure to pollen, dust, and other air contaminants. The longevity of a house is extended by improved insulation and radiant heat barriers, protecting wooden structures from moisture and termites.

All these improvements lessen a household’s impact on the environment, and thus directly contribute to creating a sustainable community.

The American Council for an Energy-Efficient Economy considers energy efficiency and renewable energy as twin pillars of sustainable energy. In this respect, an energy-efficient home is definitely a model of sustainable energy, as it uses less energy to maintain and may even use renewable energy through solar and wind power.

Tax Incentives for Green Homes

Owners of environmentally certified homes can benefit from tax breaks for Energy Star-certified appliances and energy-efficiency upgrades. According to the Energy Star website, there are federal tax credits for some Energy Star-certified products.

Homeowners can enjoy tax credits for their energy-efficiency upgrades and appliances. For example, by installing an advanced, main air-circulating fan, homeowners may qualify for a 30-percent tax credit. Installing bulk insulation, such as batts, rolls, blow-in fibers, rigid boards, expanding spray, and pour-in-place polyurethane foam will get homeowners additional tax credits, if they install the insulation themselves. Solar water heaters and solar panels also qualify for tax credits.

Kim Vatis, writing for NBC Chicago, says homeowners with energy-efficient properties can get as much as $500 tax credits.

With the current financial crisis and the increasing awareness on sustainability, green mortgages will continue to flourish, leading to more energy-efficient homes and communities.

Mike Gray

Guest Writer

Blue Planet Green Living (Home Page)