Environmentally friendly mortgages offer the potential for lower utility bills, easier credit and the ability to borrow more. This peace of mind will make your mortgage cheaper and ultimately more comfortable.
If you're shopping for a mortgage, one option you may not have considered - or even heard of - is a green mortgage (also known as an eco-mortgage). This type of loan hasn't really entered the mainstream yet, so if you're interested, you may have to do some extra work to get one, but it does have some unique advantages that can make your trouble worthwhile. In this article, we'll provide a basic overview of how a green mortgage works so you can decide if it makes sense for your situation. (The earth-smart money is on these environmentally friendly housing projects, learn more in Building Green For Your House And Wallet.)
What is a Green Mortgage?
Unlike any other type of mortgage, a green mortgage takes into consideration a home's utility costs when determining how much money to lend a borrower. The idea is that if the borrower's utility bills are lower, he/she can afford to put more money toward the mortgage payment. The result is the ability to borrow more and possibly get a better house without spending more per month than you would with a conventional mortgage. (Find out how to reduce your costs with these inexpensive tips read 6 Ways To Save On Your Utility Bill.)
As part of obtaining a green mortgage, a specialist performs an energy audit of the home you're interested in purchasing to determine the monthly savings on utility bills achieved through energy-efficient design and appliances. How much energy is used by the refrigerator, washer and dryer, and heating and cooling systems, along with how well the home is insulated, how well the roofing material keeps the house cool in the summer and warm in the winter, and other factors will be considered in the energy audit. The calculated monthly savings on utility bills is added to the borrower's income, because this is the extra money he/she will have available each month to make payments on a mortgage for an energy-efficient home compared to a regular one.
In some cases, the extra money is used not to buy a more expensive home, but to make energy improvements on a standard home. The home you want to buy doesn't have to already be energy efficient: you can take a standard home and make it energy efficient. In this case, the energy auditor will determine what upgrades could be made to the house to improve its energy efficiency, how much these will cost and by how much they will reduce the monthly utility bill. (Get a home energy audit. An energy audit will give you an idea of how you can improve your home's energy efficiency and decrease your energy bills, see 9 Ways To Save On Winter Bills.)
Why Go Green with Your Mortgage?
The obvious answer is that people want green mortgages to live in accordance with their environmental convictions. But even if you don't believe in man-made global warming, a green mortgage still offers plenty of benefits. Because of the way the home energy audit affects your income calculation, a green mortgage can allow you to purchase a larger and/or nicer home than you would otherwise be able to. And if you're on the margin of qualifying for a loan at all, a green mortgage might be the product you need to get approved.
Of course, your monthly utility bills will be lower, and as long as you get a fixed-rate mortgage, your monthly payments will be stable - perhaps more stable than if you lived in a less energy-efficient home where heating and cooling costs can swing wildly up and down from month to month. Some people think that environmentally friendly homes will have better resale value. Also, some states and localities offer tax incentives for energy efficiency. Finding these incentives takes only a quick internet search for specific state incentives for renewables and efficiency. (Going green isn't the only way to improve the resale value of your home - read Do-It-Yourself Projects To Boost Home Value to learn how simple projects can add value to your property without taking too much out of your wallet.)
What's In It for Lenders?
Lenders who offer green mortgages can attract more customers simply by offering them more options. They also offer a product that appeals to a niche market (environmentalists) and may be able to attract customers who weren't interested in getting mortgages from other lenders because they couldn't qualify for a large enough loan to purchase the property they wanted. However, green mortgages do involve more paperwork, so some lenders may be reluctant to offer them.
Types of Green Mortgages
There isn't just one type of green mortgage. There are several different products available to meet a variety of needs. The conventional energy-efficient mortgage (EEM) is the basic product discussed in this article. If you want to use the extra money to improve a non-energy-efficient home, an energy-improvement mortgage (EIM) is what you're after. If you can only afford, or only want to make, a low down payment, look into the Federal Housing Administration (FHA) EEM. Qualified veterans can also consider the VA EEM. (For more on the Federal Housing Administration, see Understanding FHA Home Loans.)
Finally, FHA 203(k) loans, while not green mortgages, provide money to fix up downtrodden properties and require that certain energy-efficient improvements, such as weatherstripping doors and windows and insulating ducts and pipes, be made to home purchases financed by these loans. And as long as you're rehabbing the home, you can incorporate other energy-efficient improvements like dual-pane windows and highly efficient appliances. As an added bonus, you may be able to combine a 203(k) loan with state or local assistance for home rehabbing.
How Much Money Might You Save?
How much money you might save from living in an energy-efficient home depends on a variety of factors, including, but not limited to, the following:
Someone in Kansas, where air conditioning use is high in the summer and heater use is high in the winter, might stand to save more from energy improvements than someone living in Arizona's milder climate.
- House Size
If you're buying a large home, the utility bills will be higher than they would for a smaller home. Energy improvements might make more sense as square footage increases.
Older homes that haven't been renovated sometimes lack the energy efficiencies found in newer homes.
- Financing Costs
When you increase your mortgage payment to pay for energy improvements or to live in an already energy-efficient house, you're basically paying interest on something to get it right away instead of waiting until you've saved up the cash to purchase it outright. You know how they say that if you don't have the money, you shouldn't buy something, with the only exceptions being a house or an education? Well, home energy improvements are not either of these things. Like most environmentally friendly products, they're a bit of a luxury item. (There are always exceptions to the rule especially when it comes to investing, check out Margin Trading: The Advantages.)
Consider this example. Instead of increasing your mortgage by $8,000 to pay for energy improvements - borrowing that extra $8,000 will cost you $9,265 in additional interest at 6% interest over the life of a 30-year fixed-rate mortgage - just wait a few years until you can pay for the energy improvements out of pocket. You'll be looking at perhaps 25 years of energy savings instead of 30, but do you think five years of higher utility bills will cost you $9,265?
If you can't find a lender who will approve you for a green mortgage, don't despair; you don't need a green mortgage to have a green home. There are many simple measures you can take to improve any home's energy efficiency. You can get a home energy audit anytime if you want a professional opinion on how to make your home more energy efficient. You can either pay a specialist, or in some cases, obtain the service for free from your utility company. There are also federal tax credits for energy efficiency that anyone can take advantage of, regardless of whether they have a green mortgage. (To learn more about keeping your utility costs down, see Save Money On Summer Bills.)
Green mortgages haven't quite found their way into the mainstream, so if you want one, you may have to ask for it. Also, just because a lender offers a green mortgage product doesn't necessarily mean that they have ethical lending practices - you should be as cautious in taking out a green mortgage as you would be with any other mortgage product. Taking out a mortgage is one of the biggest financial decisions you can make, so always run your own numbers and make sure you're getting a fair deal. Finally, remember that green mortgages aren't just for tree huggers - anyone can benefit from the added comfort and lower utility bills that come with an energy-efficient home. (For more on avoiding bad mortgages, read 7 Low-Rate Mortgage Shams and Score a Cheap Mortgage.)