What is a Green Mortgage and is it Worth It?

When buying or refinancing a home, you can finance energy-efficiency changes, such as solar panels or energy-efficient appliances, without paying the cash upfront. Some energy efficiency changes can greatly lower your utility bills, saving you money in the long run, especially if you stay in your home long term.

To get financing, you’ll need a green mortgage. This is financing in addition to traditional financing to purchase or refinance a home, and it helps you make your home more energy efficient even if you don’t have the upfront capital to cover it.

What is a Green Mortgage?

Green mortgages, or Energy-Efficient Mortgages (EEM), provide funds for homeowners or homebuyers to make energy-efficient changes to their homes. The goal is to help make energy-efficient changes more affordable, so homeowners have a lesser environmental impact by lowering their energy consumption and saving money.

The key is to finance changes significantly impacting your monthly savings, making the additional mortgage costs an intelligent investment.

How do Green Mortgages Work?

Green mortgages operate much like standard mortgages. You make monthly payments toward your principal and interest to repay the amount borrowed. The only significant difference is that you need to hire a home energy rater to assess the energy efficiency of the home you’re buying or the change you plan to make.

Some common changes that often qualify for an EEM include:

• Solar panel installation
• New energy-efficient appliances
• Installation of new energy-efficient utilities, such as HVAC systems
• Weatherization and weather stripping
• Programmable thermostats
• Installation of energy-efficient insulation

Types of Green Mortgages

Just like when you buy a home, you have several mortgage options when looking for a green mortgage, including:

• Conventional mortgage: Most borrowers can get up to 15% of the after-completed value of the property, plus the money needed to purchase the house, usually with a 3% – 5% down payment. You typically need good credit and a low to average debt-to-income ratio to qualify.
• FHA loans: FHA loans are government-backed loans that help borrowers with less-than-perfect credit get mortgage financing. You can include the cost of energy improvements in your mortgage if the amount financed is less than the energy savings you’ll obtain. The qualifying requirements are typically more flexible with these loans, making them more accessible for most borrowers.
• VA loans: Veterans who qualify for VA financing can borrow an additional $6,000 in energy efficiency costs as long as you complete the improvements within six months of closing. The limit is lower, but interest rates on VA loans are typically lower than other financing options.

How to Qualify for a Green Mortgage

To qualify for a green mortgage, you must meet the program’s credit score and debt-to-income ratio requirements, such as a conventional or FHA loan. However, there are additional considerations when you want to finance energy improvement costs, including:

• The energy savings must be greater than the cost to implement them.
• A home energy rating report must show potential savings.

Benefits of a Green Mortgage

Whether you’re concerned about the environment or want to ensure you’re getting the best deal on your home improvements, there are many reasons to consider a green mortgage.

Long-term savings

Investing in your home’s performance now can save you money on utility bills down the road. While you must invest in the improvements upfront, you realize more savings as you pay down the mortgage.

Potential for Incentives

Some companies offer incentives for borrowers who make energy-efficient changes to their homes. These could include cashback just for making your home more energy efficient.

Lower Rates

Most EEMs have lower interest rates than you’d find from financing from other sources. This saves you money in the long run and makes your mortgage more affordable.

Better Curb Appeal

Buyers often look for trendy kitchens, good living spaces, and, believe it or not, energy efficiency. If your home has solar panels or other energy-efficient improvements, it can be more appealing to buyers.

Alternatives to Green Mortgages

If you don’t want to go through the hassle of an energy rating report or be at the mercy of the results regarding how much you can finance, here are a few alternatives:

• Home equity loan: This second mortgage uses your home as collateral, but you can use the funds however you wish. You’ll receive the funds in one lump sum and must make principal and interest payments on the amount borrowed.
• Home equity loan: This is also a second mortgage that uses your house as collateral. However, you receive a line of credit rather than a lump sum loan. This allows you to use the funds as needed, repay the amount borrowed, and reuse the funds. The rates are variable on these loans, and you can make draws for up to ten years.
• Cash-out refinances: If your home is worth more than your outstanding loan, you may be able to cash out some of that equity and use it now while remaining in the home. Like home equity loans and lines of credit, you can use the funds however you wish, including making energy-efficient changes.

Final Thoughts

Utility bills can make up a large portion of your monthly bills, especially if you have a large house or family. Finding ways to lower your costs can be a great investment in your home and your finances while ensuring your home is comfortable. The key is to only borrow what you can comfortably afford to repay while ensuring you make the most of your home.