What Are Energy Efficient Mortgages?

Energy efficient mortgages are a type of mortgage that credits a home's energy efficiency in the financing of its purchase. Two illustrations of an energy mortgage include:

For homes where the energy efficiency can be improved, an energy mortgage allows the dollar savings from lower utility bills to finance energy improvements.

Shocking Origins

Energy efficient mortgages have their origins after the second oil shock. In the early 1980s, the federal government sought ways to increase energy efficiency opportunities. The four major national lenders the Veterans Administration, Housing and Urban Development, Freddie Mac and Fannie Mae began programs that focused on solar energy and other home improvements that were made before the close of escrow.

Demand for the mortgages in the 1980s languished because of lack of awareness, improvements had to be made before funding approval restrictions on the types of improvements.

However, demand for the mortgages increased in the 1990s because of increased emphasis by the federal government and significant changes by the lenders.

Stretching the Limits

Initially, energy efficient mortgages were simple two percentage point stretches, allowing borrowers of energy efficient homes to increase their debt to income ratio by two percent because of the lower utility costs.

An example of the two percentage stretch is illustrated to the right.

Now, energy efficient mortgages offered through the Department of Housing and Urban Development and the Federal Housing Administration allow buyers to finance the energy efficiency of a new home above its appraised value when the home energy rating exceeds the standards in the Model Energy Code. This allows buyers to purchase homes with prices that exceed Federal Housing Administration limits.

Example of Two Percent Stretch

Monthly
Income

Regular
Mortgage

Energy
Efficient
Mortgage 

Increased
Purchasing
Power

$2,000

$62,500

$66,933

$4,433

$2,250

$70,223

$75,372

$5,149

$2,750

$83,667

$85,955

$5,578

$3,000

$93,678

$100,400

$6,722

Source:  Energy Rated Homes of Alaska, Inc.

Another type of energy mortgage is an energy improvement mortgage. Generally, these mortgages are used for existing homes, not newly-built ones. This mortgage provides financing for cost effective improvements, recommended in an energy audit or home energy rating at the time of sale or refinancing. Typically, an energy rater inspects the home and makes recommendations on cost effective improvements. The funds for the improvements are placed into an escrow account by the lending institution. The homeowner has a minimum of three months after closing to make the improvements. A post-improvement rating is performed on the home to verify the energy savings. The lending institution then releases the escrow funds to pay for materials and labor and the total cost is added to the mortgage loan. The Federal Housing Administration and Veterans Administration are two entities that offer these mortgages.

Income Limited Mortgages

The Energy Office offers an energy improvement mortgage for those with limited incomes.

The below market rate weatherization mortgage typically finances improvements such as attic and wall insulation, new furnaces, caulking and weatherstripping.

"Getting a weatherization mortgage is very simple," Pete Davis of the Nebraska Energy Office said. "The lender verifies a person's income, then an energy audit is conducted on the home the borrower wants to buy and finally an energy audit professional makes recommendations to reduce energy use."

For more information about Mortgage Supplements, contact Pete Davis in the Energy Office.

Return to the Spring 1999 Newsletter