What Is An Energy Efficient Mortgage (EEM)?

18, March, 2024

In today's world, homeowners are increasingly seeking ways to make their homes more energy-efficient. One option gaining popularity is the energy-efficient mortgage (EEM). If you're considering purchasing or refinancing a home, understanding EEMs could be beneficial.

Energy-Efficient Mortgage (EEM) Defined

An energy-efficient mortgage (EEM) allows homebuyers or homeowners to finance energy-efficient home improvements. These improvements can include anything from upgrading insulation and windows to installing solar panels or energy-efficient appliances. The goal is to make the home more energy-efficient, ultimately reducing energy consumption and lowering utility bills.

How Do Energy-Efficient Mortgages Work?

Home purchased using an energy-efficient mortgage features solar panels on the roof.

Energy-efficient mortgages (EEMs) allow you to finance energy-efficient improvements as part of your mortgage loan. These home improvements range from simple upgrades to more substantial investments like solar panels or geothermal heating systems.

Lenders typically add the cost of these upgrades to the total loan amount. This enables borrowers to spread the expense over the life of the mortgage. Additionally, lenders may take into account the potential energy savings when determining the borrower's eligibility and loan terms. This makes EEMs a compelling option for those seeking to invest in energy efficiency.

Benefits of an Energy-Efficient Mortgage (EEM)

An energy-efficient mortgage has several associated benefits.

  • Lower utility bills: Energy-efficient mortgages enable homeowners to invest in upgrades that reduce energy consumption, leading to significant savings on monthly utility expenses.
  • Increased property value: Homes with energy-efficient features typically have higher resale values. This makes them more attractive to potential buyers in the future.
  • Environmental impact: By reducing energy consumption, energy-efficient mortgages contribute to a decrease in greenhouse gas emissions and promote sustainability.
  • Comfort and health: Improved insulation and ventilation systems can enhance indoor comfort levels and promote better air quality. This benefits the overall health and well-being of homeowners.
  • Long-term savings: While there is an initial investment in energy-efficient improvements, the long-term savings on energy bills often outweigh the upfront costs. This results in overall financial benefits for homeowners.
  • Financing options: Energy-efficient mortgages offer flexible financing options. This allows homeowners to spread the cost of upgrades over the life of their mortgage loan.

How To Qualify For An Energy-Efficient Mortgage (EEM)

Qualifying for an EEM program is similar to qualifying for a traditional mortgage. Lenders will typically look at factors such as your credit score, income, and debt-to-income ratio. However, one additional requirement for an EEM is a home energy assessment.

A home energy assessment also goes by the name of a home energy rating system (HERS) inspection. This assessment evaluates the energy efficiency of a home and identifies areas for improvement. It also helps to determine the potential savings from energy-efficient upgrades. You use it to calculate the additional amount you can borrow with an EEM.

Energy-Efficient Home Improvements

Energy-efficient mortgages typically cover a wide range of improvements. These can include:

  • Insulation: Adding or upgrading insulation in walls, ceilings, and floors to reduce heat loss.
  • Windows and Doors: Installing energy-efficient windows and doors with features like double or triple glazing, low-emissivity coatings, and insulated frames.
  • HVAC Systems: Upgrading heating, ventilation, and air conditioning (HVAC) systems to more energy-efficient models. Installing programmable thermostats and zoning systems to optimize energy usage.
  • Appliances: Replacing old, inefficient appliances with energy-efficient models, such as ENERGY STAR-certified refrigerators, washing machines, and dishwashers.
  • Lighting: Switching to energy-efficient lighting options like LED bulbs.
  • Renewable Energy Systems: Installing renewable energy systems such as solar panels, wind turbines, or geothermal heat pumps.
  • Water Conservation: Upgrading plumbing fixtures like faucets, toilets, and showerheads to low-flow or water-saving models.
  • Roofing: Installing reflective or cool roofing materials to reduce heat absorption and lower cooling costs during hot weather.

Note that eligible improvements may vary depending on the loan product.

Types Of Energy-Efficient Mortgages (EEM)

There are several types of EEMs available, each with its own set of eligibility criteria and benefits.

Conventional Energy-Efficient Mortgage

Both Fannie Mae and Freddie Mac offer energy-efficient mortgage options.

Fannie Mae HomeStyle Energy is a unique financing option designed to promote energy-efficient improvements in homes. This program offers flexibility for eligible improvements. It includes upgrades such as solar panels, insulation, HVAC systems, and more.

With Freddie Mac GreenCHOICE, homeowners can access funds to invest in a wide range of green improvements. These include solar panels, energy-efficient appliances, insulation, and more.

The types of energy-efficient improvements eligible for financing may differ between Fannie Mae and Freddie Mac's programs. There may be variations in the specific items or technologies that are eligible for financing.

In addition, Fannie Mae's HomeStyle Energy program and Freddie Mac's GreenCHOICE program may have slightly different eligibility criteria. Minimum credit score requirements or maximum loan-to-value ratios may differ between programs.

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FHA Energy Efficient Mortgage Program

The Federal Housing Administration (FHA) offers an energy-efficient mortgage program to help homebuyers finance energy-efficient improvements. FHA EEMs allow borrowers to include the cost of energy-efficient upgrades in their mortgage loan amount. This increases their purchasing power without requiring a larger down payment.

USDA Single Family Housing Guaranteed Loan Program

The U.S. Department of Agriculture (USDA) offers a program for buying homes in rural areas. They call it the Single Family Housing Guaranteed Loan Program. This program includes provisions for energy-efficient mortgages. This means you can get money to make energy-saving improvements to your home when you buy it.

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VA Energy-Efficient Mortgage

The Department of Veterans Affairs (VA) helps Veterans, Active-Duty Service Members, and Surviving Spouses with the VA loan. This loan program includes energy-efficient mortgages (VA EEMs).

These mortgages let you pay for energy-saving upgrades for homes, whether they're new or already built. VA EEMs are a good choice for Military families. They can make homes more comfortable and save money on energy bills.

How To Get An Energy-Efficient Mortgage (EEM)

To obtain an energy-efficient mortgage, start by contacting lenders who offer EEMs. Be prepared to provide documentation of your income, assets, and credit history. You'll also have to undergo a home energy assessment.

Once approved for an EEM, work with your lender to determine the cost of energy-efficient improvements and incorporate them into your mortgage loan. After closing on your loan, use the funds to make the necessary upgrades to your home.

Final Thoughts

An energy-efficient mortgage (EEM) can be a valuable tool when looking to make your property more energy-efficient. By financing energy-efficient improvements through an EEM, you can save money on energy bills, increase your home's value, and contribute to a more sustainable future.

When you're ready to purchase a new home or refinance an existing home, consider exploring the options available with an EEM to enjoy the benefits of a more energy-efficient lifestyle.

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