Green mortgages can finance an energy efficient home and save money

Residential real estate market has changed due to rising interest rates, but peak spring – if challenge for buyers and sellers – here. For many potential homebuyers, a green mortgage can be a good idea, especially as incentives to upgrade energy efficiency increase and the cost of new climate technology is falling.

Green mortgages — also known as energy efficient mortgages — It differs from a conventional mortgage in that it allows borrowers to finance certain green improvements at the same rate and conditions as their home purchase. For many homebuyers, this could mean making eco-friendly upgrades sooner than they can afford, while reducing monthly energy costs.

Here’s what you need to know about green mortgages and home financing.

How energy upgrades are included in a home loan

If the home you’re considering needs a lot of energy-efficient upgrades, like many homes, you should consider what a green mortgage can offer. Kevin Kane, chief economist for Green Homeowners United, a residential energy-efficient construction company in West Allis, Wisconsin, said in the past, buyers may have given up on buying a home because of shaped windows. raw form or because the water heater is old. .

With an energy-efficient mortgage, homebuyers can finance these types of improvements on better terms.

The U.S. Department of Housing and Urban Development, one of the agencies that provides energy-saving loans, cites the example of a couple buying a home in California for $150,000. They are loaned 95% of the property value by the FHA. Based on estimates from the required home energy assessment, the lender spent an additional $2,300 on improvements, bringing the total loan amount to $144,800, from $142,500. This couple’s monthly mortgage payment is up $17, but they’re saving $45 a month due to lower utility bills.

Sure, green mortgages won’t be right for everyone. This includes consumers who are purchasing a new construction or an Energy Star certified refurbished home.

Home Improvement and Inflation Reduction Act

The Inflation Mitigation Act — an expansive federal government effort to protect the climate — makes green improvements more profitable for prospective homebuyers.

Kane gives the example of a home that needs a new air conditioning unit. Instead of a complete replacement, potential buyers may consider install heat pump and convert the cost into a mortgage.

The homeowner can then qualify for a tax credit of up to $2,000 and a rebate, depending on income, of up to 50% to 100% of the unit’s cost up to $8,000. .

“You can do it now and don’t have to pay cash up front because the bank has already put that money into your mortgage and you can get incentives that make it easy,” says Kane. more.

Financial requirements and restrictions

There are restrictions on what can be funded, and there are limits on what can be included in a green mortgage.

For example, Fannie and Freddie Mac’s specifications state that the maximum available energy financing is 15% of the property’s “when completed” value, which is the assessed value of the home after upgrading. finished level. So, under these programs, an eligible buyer with a $100,000 home after an upgrade could get up to $15,000 from a mortgage transaction.

There is also an additional step that usually must occur before funding is approved. It is a home energy assessment conducted by a trained professional to analyze energy usage in the home and recommend energy saving improvements. The assessment projects the cost and potential savings for each improvement.

In addition, to comply with the terms of the mortgage, the homeowner must commit to finding a contractor and completing the work on the existing structure within a certain period of time, usually three to six months, said John W. Mallett, a mortgage broker. founder and president of MainStreet Mortgage in Westlake Village, California. This may not be suitable for those who want to spend time repairing their house. He said they might be better off with a different kind of financing later on.

Drew Ades, senior adviser at RMI, a nonprofit focused on accelerating the clean energy transition, said most lenders can offer green mortgages, but It is very helpful to work with someone who works with them often. A lender says lenders can refer you to a home energy assessor they’ve worked with before, and the lender will also be familiar with how to maximize benefits for homebuyers.

Be sure to compare costs and rates from multiple lenders before choosing a provider, Ades adds, “Just because someone offers you this product doesn’t mean you’re getting the best rate.” .”

Refinance into a green mortgage

Existing homeowners looking for an energy-efficient upgrade may also consider refinancing with a green mortgage to cover the cost of the upgrade. This will most likely not be a cost-effective option for those refinancing when rates are at all-time lows or near lows as rates have moved significantly higher.

However, there are some scenarios where refinancing could still make sense, Kane said. He gives the example of first-time homebuyers who couldn’t afford to improve when they first bought their home and didn’t own it long enough to get a home loan. They can refinance and put green innovations into the mortgage. If their interest rate is already 6.5%, a new rate could be at the same rate, and even if they pay $2,000 to $3,000 in closing costs, they could get a similar amount. in tax incentives under the Inflation Reduction Act, he said.