What are Energy Efficient Mortgages and Energy Improvement Mortgages, and should I be interested in one?
Given the current state of the national economy, many people are wondering what to do to help reverse the decline in their home’s value. One proven option is to increase a home’s energy efficiency. To quote RESNET; “... Another study published in the Appraisal Journal documented that the market value of a home increases $20 for every $1 decrease in the annual energy costs.” So, if energy efficiency improvements can add to a home’s value, how can a person finance the energy upgrades? Here is where the Energy Efficient Mortgage (EEM) for new homes and Energy Improvement Mortgage (EIM) for existing homes can be very attractive.
These energy-related mortgages provide a proven method for financing viable energy improvements through the use of a knowledgeable energy person called a “Certified Home Energy Rater” or “rater.” An energy rater conducts a comprehensive energy analysis of a residential building using proprietary software and a “blower door,” which is a calibrated testing device designed to either pressurize or depressurize a building. The blower door helps determine the total amount of air leakage for a particular building, normally in terms of air changes per hour (ACH), and also helps the rater and owner find the air leaks. Why is this important? Air leakage is typically a major contributor to a building’s energy bills and is one of the easier and less expensive items to fix, if you know where the leaks are. Some energy ratings also include the use of an infrared (thermal) imaging camera and other test equipment, but all ratings should include the blower door and rating software.
Once the energy efficiency of the building is determined, the rating software then assigns a numerical score or “energy index” number to that particular structure. If the score is 100, then the building basically meets the energy code for that jurisdiction. If the number is above 100, the building is less energy efficient and if the number is below 100, then the building is more energy-efficient. In other words: Just like golf, lower numbers are better. An index number of “0” means that the building is achieving a zero-energy score, sometimes called a “zero-energy home.”
While the majority of homes and other residences will likely never achieve a “zero-energy” score, this doesn’t mean that saving energy isn’t important. Many energy improvements have a return-on-investment (ROI) that is significantly better than the stock market, local bank savings account or even the bond market or CDs. If the idea of obtaining an energy-related mortgage is interesting to you, you will probably think, “How can I get such a mortgage?” The short answer is, “Everywhere!” This is because the secondary housing financing market, such as Fannie Mae, Freddie Mac, FHA, VA and others have provisions for purchasing energy mortgages that are originated by the primary market, i.e. banks, mortgage brokers, savings and loan institutions and others involved in home financing or home improvement loans. The secondary market will “buy the paper” generated by the primary market, so energy-related mortgages are available for everyone ... at least in theory.
The main problem has been that many banks and other lending institutions aren’t aware of or aren’t disclosing that energy mortgage options are available to their customers. This is changing, however, because lending institutions are now rethinking their loan processes and are finding that energy-efficient buildings are a good investment. Encouraging energy-related mortgages will begin to translate into encouraging energy-efficient construction and/or remodeling. The banks benefit by having a better loan portfolio from promoting energy efficiency, and the customer/client wins by owning a more energy efficient building. Even the energy providers gain benefits through this process because they can make their “product” go further or can possibly experience lower peaks during extreme conditions.
To learn more about EEMs and EIMs, visit Residential Energy Services Network or Energy Star. You can also find a wealth of information by searching for the terms “Energy Efficient Mortgage” or “Energy Improvement Mortgage” online. If you have questions about this article, please feel free to contact the author.
—Kenneth C. Riead, Senior CEM/CDSM - Certified HERS Rater, Hathmore Technologies