ENERGEY MORTGAGE

A mortgage that credits a home's energy efficiency in the home loan. For an energy efficient home, for example, it could mean allowing the borrower a greater debt-to-income ratio and giving the home buyer the ability to buy a higher quality home because of the lower monthly costs of heating and cooling the home. For homes in which the energy efficiency can be improved, this concept allows the money saved in monthly utility bills to finance energy improvements.

A variety of energy mortgages have appeared in recent years and more are anticipated as the Residential Energy Services Network (RESNET), the operating home energy rating systems and the Environmental Protection Agency increase education/information outreach. Energy mortgages are sponsored by both federally insured mortgages programs (Federal Housing Administration and Veterans Administration), as well as, the conventional secondary mortgage market (Fannie Mae and Freddie Mac).

As interest in improving the energy efficiency of America's housing stock increases, so has the availability of energy mortgages. A variety of approaches have been piloted in select states and several energy mortgage programs are now available nationwide. The two types of energy mortgages are:

• ENERGY EFFICIENT MORTGAGES (EEMs) - In its initial form, the energy efficient mortgage was a straight two percent stretch which allowed the buyers of energy efficient homes to qualify for up to two percent more debt because of their lowered monthly utility costs. This stretch allowed more buyers to afford the higher quality, energy efficient homes. This program has worked best when a home energy rating system is available to document the relative efficiency of a home.
  
  The U.S. Department of Housing and Urban Development's Federal Housing Administration (FHA) recently announced its version of the energy efficient mortgage program. Basically, FHA will allow home buyers to finance the energy efficiency of a new home above its appraised value when the home energy rating documents the home exceeds the Model Energy Code. Through this program, home buyers can purchase homes whose prices exceed FHA limits.
   
• ENERGY IMPROVEMENT MORTGAGES - This type of energy efficient mortgage finances cost-effective improvements recommended in an energy rating through the mortgage at the time of sale or refinancing. A home energy rater inspects the home and makes recommendations on cost-effective energy improvements. The rating also provides information on the relative economic return on the improvements. The funds for the improvements are placed into an escrow by the lending institution. The home owner has a maximum of three months after closing to make the improvements. Once the improvements are made, a post-improvement home energy rating is performed to confirm the improvements were installed. The lending institution then releases the escrow funds to pay for materials and contracted labor. The total expended is rolled into the mortgage loan. The FHA and VA mortgage energy improvement mortgage programs can finance energy improvements above the appraised value, if the measures are shown to be economical. Fannie Mae and Freddie Mac are piloting a similar effort in Alaska, Arkansas, Colorado, Iowa, Louisiana, Mississippi, Vermont, and Wisconsin.

Below are examples of an energy efficient mortgage and an improvement mortgage. In the first, the home buyer adds $4,000 to his mortgage loan to finance the energy upgrade of the home being purchased. The increase in the monthly mortgage payments, resulting from the financing of the energy upgrades, is more than offset by the monthly energy savings. The second example illustrates how the stretch works so a buyer can afford a more expensive, energy efficient home.

EXAMPLE I: ENERGY IMPROVEMENT MORTGAGE
$75,000 VA 30-Year Mortgage at 7.5% Interest
(Source: Energy Rated Homes of Vermont, Inc.)

THE BOTTOM LINE: The buyer in this example reduces his monthly housing costs by $32 --- nearly $400 a year --- and has a more comfortable and durable home, after making the energy efficiency improvements.

EXAMPLE II: ENERGY EFFICIENT MORTGAGE
2% Stretch - Increased Debt-to-Income Ratio When Buying an Energy Efficient Home
(Source: Energy Rated Homes of Alaska, Inc.)

THE BOTTOM LINE: The Buyer of an Energy Efficient Home Can Get a Bigger Mortgage Loan and More Easily Afford His Dream Home!

The institutionalization of energy mortgages into the national mortgage market and their widespread use could mean a significant improvement in the quality of our country's housing stock without the need for government or utility subsidies.

Energy improvement mortgages offer home buyers of existing homes opportunities to:

• Upgrade the homes they are buying immediately without tapping the family's savings or taking out a higher interest, home improvement loan.
• Own a more comfortable home that costs less to heat and cool.
• Net a better return when selling because of the higher resale value.

Energy efficient mortgages offer opportunities to:

• Help more lower and middle class American families achieve the American dream of home ownership.
• Purchase higher quality and more affordable housing.
• Create a market demand and value for energy efficient homes.
• Catapult new construction standards above minimum energy codes.

Check with your Builder and Mortgage Lender to find out if the home you are considering qualifies for an ENERGY EFFICIENT MORTGAGE.