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Live Green

“Green” Mortgages Help Homebuyers Finance Environmentally Conscious Choices

By purchasing a home built to meet greater energy-efficiency standards or committing to make energy improvements to an existing home, you could qualify for an energy-efficient mortgage (EEM) – also known as a “green” mortgage – which can increase your borrowing power, yield certain discounts, or both. A more energy-efficient home also promises lower utility bills and less environmental impact, making green mortgages a win-win-win proposition. 

What are Energy-Efficient Mortgages?

EEMs, or green mortgages as they are more commonly known, are centered on the idea that more energy-efficient homes will result in lower monthly utility bills. When calculating a borrower’s income-to-debt ratio, lenders factor these utility cost savings in as income, enabling potential homebuyers to borrow more toward more expensive homes.

EEMs also allow borrowers to fold the costs of planned energy improvements – from better insulation to a new furnace to solar panels – into the total mortgage amount. In fact, homebuyers can borrow up to 15 percent of the home’s value for such improvements, and the money is held in escrow for use as the improvements are made.

Green mortgages are actually nothing new. They’ve been around since the late 1970s, when then-President Jimmy Carter signed an executive order directing federally sponsored lenders to offer consumers incentives for energy-efficient homes. Today, the U.S. Federal Housing Authority spearheads the EEM initiative, insuring loans issued by FHA-backed lending institutions such as banks, savings and loans companies and mortgageg firms. Amid the recent subprime mortgage crisis, lenders have begun to more proactively market the loans as a more secure way to qualify marginal borrowers.

Qualifying for a Green Mortgage

There are two main ways to qualify for a green mortgage. The first is by purchasing a newly constructed home built to higher energy-efficiency standards as verified by a third-party inspector. Homes certified  through the ENERGY STAR and LEED for Homes programs, for example, qualify. For homes that are not already part of these nationally recognized certification programs, buyers or sellers can enlist a home energy rater to inspect the home and issue a Home Energy Rating System (HERS) report verifying that minimum efficiency standards have been met.

In the case of existing homes for which buyers want to qualify for planned energy improvements, a home energy rater performs an inspection and issues a HERS report. In these cases, the report will forecast potential energy savings to be gained through recommended efficiency improvements, providing an estimate of what those improvements will cost. These figures are then used by the lender to calculate the additional loan amount that can be put into escrow to cover the improvement costs.

In both cases, the lender will approve a certified auditor to verify the home energy ratings. Improvements covered under the provisions of green mortgages can include – but are not limited to – carpeting, insulation, replacement windows, energy-efficient appliances, increased heating and cooling efficiency, solar panels, green roofs and more.

Demand for Green Mortgages Swells

According to Jeffrey Cole, founder of myenergyloan.com, consumer demand is driving for more green mortgages in both the residential and commercial sectors. Myenergyloan.com is an Atlanta-based green-lending program that provides closing-cost discounts and even lower interest rates to buyers of energy-efficient homes. Cole says that mortgage volume for green loans his company has issued has increased by 25 percent in the past year alone. In fact, he and a business partner in the process of raising $10 million to launch the first green real estate finance bank. 

Meanwhile, other countries are also joining the green-mortgage movement. According to a July 2009 article in London’s Financial Times, Britain’s government plans to offer lower-interest green mortgages to fund the installation of solar panels, wind turbines, and other energy-saving features in residential homes. Incentives including lower taxes may be used to encourage homeowners to take advantage of the new loans, which are part of an effort to to cut carbon emissions in Britian 80 percent by 2050. Meanwhile, homeowners who don’t participate may face tax increases.

To learn more about green mortgages in the United States, consult the following links:

U.S. Department of Housing and Urban Development information on EEMs
http://www.hud.gov/offices/hsg/sfh/eem/energy-r.cfm

See DOE/HUD Initiative on Energy Efficiency in Housing: A Federal Partnership, Program Summary Report
http://www.huduser.org/

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