Green Mortgages: Another Option for Sustainability
As the global green building and retrofitting movement continues to gain traction, many homeowners are choosing to “go green” by upgrading to more energy efficient appliances and initiating energy saving home improvements.
One option for funding these upgrades includes a mortgage program that many, even those who actively engage in environmentally-conscious lifestyles, don’t even know exists: the green mortgage.
The Definition of a Green Mortgage
A green, or energy efficient mortgage (EEM), is one that allows for the homeowner to borrow additional money to fund energy efficient upgrades to an existing home or a home being built.
Upgrades may include:
- Double-paned, vinyl windows
- Energy Star appliances
- Modern, technologically advanced heating and cooling systems
- Modern, technologically advanced HVAC systems
- Programmable thermostats
- Active and passive solar technologies (especially water heaters)
- Insulation upgrades
- Chimney replacement or repair
- Water-wise irrigation systems
Green mortgages are backed by government as well as private mortgage programs and are folded into pre-existing primary mortgages. Insured by the FHA, VA, and the conventional secondary mortgage market like Freddy Mack and Fannie Mae, green mortgages are offered by all the standard providers: banks, mortgage companies, and other lenders.
While they are generated independent of a primary mortgage or mortgage refinance, they are not considered “second’ mortgages and allow for the borrower to continue making a single payment each month with no additional lien.
Unique from other mortgage classifications, green mortgages consider residential utility costs when figuring the amount to be lent to the borrower. Conceptually, the amounts borrowed may be larger with the understanding that owners of energy efficient homes use less electricity, water, etc. and realize lower utility bills. In turn, this savings in cost allows the borrower to pay the larger mortgage payment.
Uses for Green Mortgages
Green mortgages may be used for a variety of reasons, including:
- Acquiring cash for investment in energy efficient upgrades to a new home
- Borrower assistance in qualifying for a larger mortgage to purchase an already energy efficient home (up to 33% of a borrower’s debt-to-income ratio as opposed to 29% without a green mortgage)
- Acquiring cash to fund green renovations during mortgage refinance
- Increasing comfort and affordability of older homes via green upgrades
- Helping environmentally conscious homeowners to use less energy and water, thereby reducing their carbon footprint while promoting sustainability
While the reasoning behind opting for a green mortgage is certainly likely to vary from individual to individual, the results are generally the same: increased comfort in a healthier, more energy-wise home environment that realizes lower monthly utility bills and is less expensive to maintain.
Green Mortgages Are Applicable to Most Home Mortgages
If a borrower is purchasing a home and is determined that adding energy efficient fixtures and features is desirable, the borrower would seek approval for a standard mortgage initially to fund the purchase. Upon securing this primary mortgage a green mortgage would then be secured to pay for the energy efficiency measures and upgrades.
In the case of mortgage refinancing for a home that is already owned but in need of energy efficient improvements, a green mortgage could be folded into the primary mortgage to pay for the renovations.
For those home buyers who are seeking to purchase a property that already includes energy efficient appliances, features, etc. lenders will recognize the positive effect these will have on future utility bills. In turn, the overall amount lent will be larger due to the fact that reduced energy usage will translate to lower bills, making the home less expensive to own.
Qualifying for a Green Mortgage
Generally, most borrowers don’t have to do anything special in order to qualify for a green mortgage, as those that qualify for a primary mortgage already will also likely qualify for a green mortgage. Further, additional down payments are not required for the green mortgage, an important facet for many cash-depleted home buyers.
For the green mortgage to qualify for inclusion in the primary mortgage, the upgrades must be certifiably practical and cost effective, meaning that the total cost of the improvements must be superseded by the overall financial value of the energy saved throughout the life of the improvement. Thus, if a water-reducing irrigation system costs $1000, it must result in a water bill savings of over $1000 throughout the course of the system’s operative life.
Procuring a Green Mortgage
Determining just exactly what improvements to a home are necessary is the first step in getting a green mortgage. This is accomplished by staging a Home Energy Rating System (HERS) inspection, an evaluation used to assess how efficient a house is, with a licensed, trained energy rater agent. This agent will thoroughly inspect the residence, accounting for the home’s “envelope” (how well it retains heat, how drafty it is, etc.,) how well insulated it is, the age and effectiveness of windows, doors, appliances, etc., the effectiveness of heating and cooling systems, the climate of the region where the home is located, etc. Additionally, these ratings run anywhere from $250-$900 and can be financed as part of the loan if it isn’t paid for upfront in cash.
A standard HERS report will include:
- A comprehensive, all-encompassing rating for the house
- What cost-effective energy efficient upgrades are recommended
- Estimates of the costs, savings, and effective operation life of the upgrades
- A house rating estimate post upgrades
- Before/after estimates of annual energy costs for the home
Once the HERS inspection is in hand, the borrower is notified of the qualifying amount and may then decide upon which upgrades will be purchased. Upon finalization and closing of the green mortgage the lender then deposits the funds in an escrow account upon which the borrower generally has 90-180 days to hire industry professionals to make the improvements. Once an inspection is performed, to verify that the agreed upon improvements have been completed satisfactorily the money is then paid to the borrower.
Green mortgages can be an effective means for home owners to both save money and play a role in promoting sustainability and sound environmental practices. Moreover, energy efficient homes are often more pleasant, comfortable, and healthful places to reside in since they are warmer in the winter months, cooler in the summer months, and realize improved air quality.
Like with any complex, information-rich financial agreement, green mortgage loans require ample due diligence, discussion, and consideration before moving forward.