Energy Efficient Mortgages

Advantages

  • Long term allows for low monthly repayments
  • Can be combined with an existing home refinance or home purchase
  • Interest costs should be tax deductible in most cases for borrower

Disdvantages

  • Home buyers are often overwhelmed with other issues and not able to think about energy improvements at time-of-sale
  • Requires lender adoption of the program
  • Amount of paperwork and cost of mortgage financing might not be appropriate for small projects

Energy efficient mortgages (EEMs) encourage energy efficiency by giving buyers a better rate or more borrowing capacity to buy an energy efficient house or to cover the cost of new energy improvements. For an EEM program, state and local governments typically engage via credit enhancement, such as an interest rate buy-down or loan loss reserve.

EEMs give property owners the opportunity to finance cost-effective, energy-saving measures as part of a single mortgage. The mortgage can allow a repayment period to between 15 and 30 years, thus amortizing the costs of the energy efficiency improvement over time. Property owners can secure an EEM at the time that they purchase a home, or refinance their existing mortgage.

There are several types of energy efficient mortgage products in use today, however adoption remains limited. One prominent structure is the Federal Housing Administration's Energy Efficiency Mortgage, which allows for additional borrowing based upon the assumption that additional income will be available to the homeowner as a result of energy efficiency improvements. Developing programs in Maine, New York, and Colorado inject capital into traditional mortgage products to "buy down" the interest rate that is charged to borrowers as an incentive to finance energy retrofits. A third structure that remains in the testing phase assumes that the energy savings and reduced exposure to energy costs reduces the risk profile of the loan and on average should lead to better loan performance. The reduced risk justifies a lower interest rate which in turn improves the loan pricing for borrowers, while leaving underwriting criteria unchanged.

EEM products promote financing or refinancing of homes with new mortgages specifically designed to include major energy improvements. Since EEMs are most appropriate for home purchases, simplicity and expedience is critical given the complexities associated with the home purchase process.

Resources

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