What Is an Energy Improvement Mortgage?

An energy improvement mortgage is a home loan that creates an escrow account to fund cost-effective improvements to a property’s energy efficiency. The funds can be obtained when a property is purchased or during a mortgage refinancing. If obtained at the time of purchase, there is no change to the down payment.

Key Takeaways:

  • An energy improvement mortgage is one that funds cost-effective improvements to a property’s energy efficiency.
  • The funds can be obtained at the time of purchase or during refinancing.
  • The proposed improvements must save more on energy bills over time than they will cost to implement.
  • Energy improvement loans are insured by the U.S. Federal Housing Admininstration (FHA) under the U.S. Department of Housing and Urban Development's Energy Efficient Mortgage Program.

Understanding Energy Improvement Mortgages

To qualify for an energy improvement mortgage, borrowers must get an energy assessment of the home they intend to purchase. Qualified energy raters, assessors, or auditors must conduct the assessment, and the proposed improvements must save more on energy bills over time than they will cost to implement. Assessments typically result in a list of cost-effective improvements that meet the required criteria.

The U.S. Federal Housing Administration (FHA) insures energy improvement mortgages under the U.S. Department of Housing and Urban Development’s Energy Efficient Mortgage Program, which started as a pilot in 1992 and expanded nationwide in 1995. As with similar FHA programs, borrowers receive energy improvement mortgages from regular consumer lending institutions. Borrowers must qualify only for the loan amount required to purchase the home. Lenders do not include the portion of the mortgage to be used for energy efficiency improvements when qualifying borrowers.

How Energy Improvement Mortgages Work

Energy improvement mortgages work on the theory that a homeowner’s potential savings from increased efficiency will more than cover the extra up-front capital costs of making the changes. For example, homeowners can expect appropriate improvements to insulation or upgrades to heating, ventilation, and air conditioning (HVAC) systems to save ongoing expenses for electricity, fuel, or both, depending on the type of system involved. Such improvements also tend to improve the home’s resale value, offering more equity for the homeowner and more valuable collateral for the lender.

Energy Efficient Mortgages

The FHA distinguishes energy improvement mortgages from a similar offering it calls energy-efficient mortgages. Where energy improvement mortgages offer extra funds to make energy improvements, energy-efficient mortgages give homebuyers a credit for energy efficiencies already present in the home they purchase. These mortgages require a similar energy audit conducted by a qualified energy rater, assessor, or auditor. As with energy improvement mortgages, borrowers qualify for extra loan funding insured by the FHA based upon the amount of cost savings identified. For energy efficient mortgages, the FHA sets a maximum loan increase calculated as 5% of the lesser of:

  1. The value of the property.
  2. 115% of the median price of a single-family home in the area.
  3. 150% of Freddie Mac’s current limit for a conforming mortgage loan.