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Financing an Energy-Efficient Home October 2000 The average homeowner spends close to $1,300 a year on utility bills. But an energy-efficient home—with such features as proper insulation, high efficiency heating and cooling systems, and energy-efficient windows—can lower your utility bills by 10 to 50 percent. It's easier than you may think to enjoy the savings and comfort of an energy-efficient home. Since an energy-efficient home is cost-effective, there are financing programs available from mortgages to home improvement loans, which allow more people the opportunity to live in such a home. You can benefit from energy-efficient financing whether you're buying, selling, refinancing, or remodeling a home. If you're looking to buy an energy-efficient home, you can qualify for a better, more comfortable home because with lower utility costs, you can afford a slightly larger mortgage payment. You can also obtain financing to make energy-efficient improvements to an older home before moving in or to your existing home. And if you put your home on the market, you can use its energy efficiency as an attractive selling point. Home Energy Rating Most energy-efficient financing programs will encourage you to
have an energy rating for your new or existing home, which will tell you and
the lender how energy-efficient it is. A rating typically involves an
inspection by a professional energy rater who is certified under a nationally
or state accredited home energy rating system (HERS). There are several options
regarding HERS, so the type of HERS used will depend on where you live. Some
states even have more than one HERS. Some of the organizations listed at the
end of this fact sheet may be able to provide you with more information
regarding HERS in your state. For the most part, an energy rater will inspect the energy-related features of a home, such as insulation levels, window efficiency, heating and cooling systems, and air leakage. After the inspection, the energy rater will probably give you a report that includes the home's energy rating along with an estimation of annual energy use and costs. The report also may include recommended energy-efficient improvements, if needed, and their costs, as well as the potential annual savings and eventual payback of the improvements. To help qualify for most energy-efficient financing, the report usually must show that the home is energy-efficient or that recommended improvements are cost-effective and will save you more money than you'd be borrowing to install them. While calculating whether a borrower qualifies for a mortgage, a lender can recognize these savings and add the cost of the improvements into the mortgage. Or, if the home is already energy-efficient, the lender can stretch the debt-to-income qualifying ratio, which is expressed as a percentage (the ratio is calculated by dividing a borrower's monthly payment obligation on long-term debts by the borrower's net effective income or gross monthly income). The cost of a home energy rating and how it can be paid—by the borrower, the seller, the lender, the real estate agent, or financed as part of the mortgage—as well as the availability of certified energy raters, can vary from state to state and from one energy-efficient financing program to another. Energy-Efficient Financing Programs You can apply for energy-efficient financing through a government-insured or conventional loan program. Some states even have programs for their residents, so it's a good idea to contact your state energy office to find out if your state does. There are two types of energy-efficient mortgages (EEMs): one for
a new home and one for an existing home. With an EEM, you can purchase or
refinance a home that is already energy-efficient. Or you can purchase or
refinance a home that will become energy-efficient after energy saving
improvements are made. Most energy-efficient financing programs offer both
types of EEMs, as well as home improvement loans for making energy efficiency
upgrades to your existing home. Here's an overview of some of the energy-efficient financing programs available. Each program is subject to change; therefore, you should contact a program directly for the most current, detailed information.
Government-Insured U.S. Department of Housing and Urban Development Under the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Authority (FHA) insures mortgage and home improvement loans, through its approved lenders, for borrowers who would not otherwise qualify for conventional loans on affordable terms, such as some first-time home buyers and some residents of disadvantaged neighborhoods. FHA Energy-Efficient Mortgage FHA allows borrowers to finance the cost of adding energy-efficient improvements to new or existing homes as part of their FHA-insured purchase or refinancing mortgage.
This EEM can be used in conjunction with several other FHA-insured mortgages, including the 203(k) rehabilitation mortgage insurance described below. FHA Section 203(k) Rehabilitation Mortgage Insurance
When purchasing an energy-efficient home, an FHA-approved lender can stretch the borrower's debt-to-income ratio by 2 percent. FHA Mortgage Increase for Solar Thermal Systems The maximum loan limit under FHA's standard 203(b) or 203(k) property rehabilitation mortgage insurance can be exceeded by 20 percent if the home has or will have a passive or active solar heating system. The home must also have a 100 percent operational, conventional backup system. FHA Title I Property Improvement Loan Insurance FHA also insures home improvement loans, including those that will make a home more energy-efficient, for homeowners with FHA-insured mortgages. It features:
U.S. Department of Veterans Affairs
A VA refinancing loan may not exceed 90 percent of the home's appraised value plus the costs of the improvements. Conventional Most of the national lenders who offer energy-efficient financing operate through one of the following programs. ENERGY STAR® Mortgage The program also encourages lenders to provide EEMs for certified ENERGY STAR® homes. An ENERGYSTAR® mortgage offers a minimum 2 percent stretch on a borrower's debt-to-income ratio, plus at least one additional incentive for borrowers. Incentives may include:
Fannie Mae Energy-Efficient Mortgage Fannie Mae encourages lenders to offer its EEM by providing incentives and specific criteria for those that it's willing to purchase from lenders. Both existing and new homes fall under this EEM.
Residential Energy Efficiency Improvement Loan Fannie Mae is partnering with utility companies to provide loans to utility customers for the installation of energy-efficient home improvements. The loans feature:
Freddie Mac Energy-Efficient Mortgage Like Fannie Mae, Freddie Mac provides incentives and criteria, as well as flexible guidelines, for EEMs that it's willing to buy, which encourage lenders to offer them. However, the EEMs are limited to purchasing existing energy-efficient homes or those to be retrofitted or renovated for energy efficiency.
E Seal Energy Efficiency Mortgage This EEM is available through utilities with E Seal certified programs. It can be used to finance the purchase of a new home with energy efficiency upgrades or to refinance an existing home while adding these improvements. It features:
Residential Financing Program For energy-efficient home improvement loans, E Seal's program participates with Fannie Mae's Residential Energy Efficiency Improvement Loan program (see above). When it comes to energy-efficient financing—whether you want to purchase, refinance, or remodel a home—it's best to work with lenders and/or real estate agents who are familiar with home energy ratings and program requirements. If you'd like a home energy rating report, it's also best to work with a certified energy rater. In all instances, it's always a good idea to ask for references and check companies with your local better business bureau.
Resources The following are sources of additional information on energy-efficient financing: The Energy Efficiency and Renewable Energy Clearinghouse
(EREC) EREC provides free general and technical information to the public on many topics and technologies pertaining to energy efficiency and renewable energy. You can also contact your state and local government energy offices for region-specific information on energy-efficient financing. Organizations E Seal Phone: 1-888-STAR-YES (1-888-782-7937) E-mail: info@energystar.gov Web site: http://www.epa.gov/hhiptool/ Fannie Mae Federal Housing Authority (FHA) FHA can be contacted through your local HUD office, which can be found in the phone book or on HUD's Web site. Freddie Mac National Home Energy & Resources Organization (HERO)
Provides state-by-state listings of the energy raters it trains and certifies. Residential Energy Services Network (RESNET) A national network of mortgage companies, real estate brokerages, builders, appraisers, utilities, and other energy and housing professionals dedicated to improving the energy efficiency of the nation's housing. It provides state-by-state directories of conventional EEM lenders and energy raters. U.S. Department of Veterans Affairs (VA) Web Sites Financing Solutions Provides useful links to energy efficiency and renewable energy financing resources.
Reading List The list is not exhaustive, nor does the mention of any publication constitute a recommendation or endorsement. Borrower's Guide to Financing Solar Energy Systems: A Federal Overview, Second Edition, produced for the U.S. Department of Energy (DOE) by the National Renewable Energy Laboratory (NREL), 1999. Available in PDF on the DOE Million Solar Roofs Web site at http://www.millionsolarroofs.com/ or from NREL at (303) 275-4363. Energy-Efficient Mortgage Homeowner Guide, Pacific Gas & Electric Company, 1996. Available on the Alliance to Save Energy Web site at http://www.ase.org/consumer/eemguide.htm. Financing Home Energy Efficiency: An EEM Handbook, R. Martin, Iowa Association of Municipal Utilities, 1997. Available on the Florida Solar Energy Center Web site at http://www.fsec.ucf.edu/bldg/fyh/ratings/lndrhndbk/index.htm. A Shopper's Guide, Energy-Efficient Mortgages, More House for Less Money, DOE, 1999. Available from the DOE Office of Consumer Information through e-mail at consumer.eere@nrel.gov or at 1000 Independence Ave., SW, 4A-227, MA-9, Washington, DC 20585. |
HERS Example
HERS Scale Points Stars Energy Consumption 0-39 * More than 3 x the reference home 40-59 ** More than 2 x and up to 3 x the reference home 60-79 *** More than 1 x and up to 2 x the reference home 80-85 **** 30% less and up to 60% less than reference home 92-100 ****+ 60% less and up to 100% less than reference home
Table 1. This scale, developed by the National Home Energy Rating Systems Council, is based on the U.S. Department of Energy's national voluntary guidelines for HERS uniformity. For rating purposes, a subject home is compared to a "reference home," which scores 80 points on a 100-point scale with a rating of four stars. Every 5% decrease in the annual energy costs between the subject home and the reference home increases the subject's home score by 1 point from 80 points. Meanwhile, every 5% increase reduces the score by 1 point from 80 points. Note: your state may use a different HERS and scale.
HERS Report An Energy-Effieicnt Home
Estimated Annual Energy Use & Costs
Description Energy Use Energy Cost Space Heating 23.9% 21.90 Mbtu $110.33 Space Cooling 33.2% 30.41 Mbtu $588.61 Water Heating 16.6% 15.23 Mbtu $76.14 Other Energy Uses 26.3% 24.12 Mbtu $272.36 Total 100% 91.66 Mbtu $1,047.44
Source: National Home Energy & Resources Organization, Inc.
*Mbtu= 1,000,000 Btu
Table 2. Based on the HERS scale in Table 1 (above), this brand new, energy-efficient, 3,585 square-foot home in Houston, Texas, received a score of 89 points and five stars. The home features double-glazed windows, a 40-gallon natural gas water heater, a natural gas central air furnace, and an electric central air conditioner. A programmable thermostat controls the furnace and air conditioner.
A Home In Need of Energy-Efficient Improvements
Annual Energy Use & Costs without Improvements
Description Energy Use Energy Cost Space Heating 78.5% 233.44 Mbtu $1,141.43 Space Cooling 10.5% 29.27 Mbtu $645.77 Water Heating 6.2% 17.60 Mbtu $88.02 Other Energy Uses 4.9% 13.92 Mbtu $265.04 Total 100% 284.79 Mbtu $2.140.26
Source: National Home Energy & Resources Organization, Inc.
*Mbtu= 1,000,000 Btu
Table 3. Based on the HERS scale in Table 1 (above), this 1,475 square-foot home in Tulsa, Oklahoma, received a score of only 21 points and one star. The home has single-paned windows, a 40-gallon natural gas water heater, natural gas central furnace, and an electric central air conditioner. A manual thermostat controls the furnace and the air conditioner. Equivalent carbon-dioxide emissions of 31.01 tons per year.
Estimated Annual Energy Use & Costs with Improvments
Description Energy Use Energy Cost Space Heating 58.7% 63.99 Mbtu $326.90 Space Cooling 12.4% 13.46 Mbtu $291.73 Water Heating 16.2% 17.60 Mbtu $88.02 Other Energy Uses 13.92% 13.92 Mbtu $265.04 Total 100% 284.79 Mbtu $971.69
Source: National Home Energy & Resources Organization, Inc.
*Mbtu= 1,000,000 Btu
Table 4. The homeowner will save more than 50% annually in energy costs if recommended energy-effiecient improvements are made to the house in Table 3 (above). These improvements include sealing heating and cooling ducts, caulking, weatherstripping, installing a more energy-efficient central cooling system (10 SEER), installing more insulation in the crawlspace/basement and in the ceiling, and insulating hot water pipes. Payback for the improvements is estimated at a little more than 4 years. Equivalent carbon-dioxide emissions of 10.88 tons per year.
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