Energy-efficient mortgages are one of the most beneficial and under-utilized programs the consumer can find and capitalize upon in today’s real estate market. The idea behind an energy-efficient mortgage is that if you live in an energy-efficient home, you will spend less money each month for energy; as a result, you can afford to spend more on the mortgage payment. Lending institutions that provide energy-efficient mortgages will factor the expected savings in operating costs into their analysis of how much debt you can carry, and they will let you carry a larger debt-to-earnings ratio with your mortgage.
An energy-efficient mortgage can add an additional 15% of a home’s appraised value to the principal of a new loan or a refinance, often at no additional cost, no compromise in the loan-to-value ratio for the borrower, and sometimes at a better rate. The borrower will, of course, pay a bit more on principal and interest over the course of the loan. However, as this additional principal is used to install energy efficient measures, it is not uncommon for the property owner to realize a utility savings that exceeds the the increased monthly loan amount. The property owner therefore increases the value of their property, increases the comfort level of the home and lowers their monthly expense totals. When working with a lender who offers and understands the energy-efficient mortgage programs available, the steps for the borrower are straight very straightforward.
There are no additional costs associated with many energy efficient mortgage options, other than the cost of the additional dollar amount in amortized principal and interest. By definition, the savings created by the energy efficiency measures are greater than the additional loan costs. This provides the assurance lenders need to conclude loans of this nature are good business.
In fact, the attractiveness of the energy efficient mortgage options also extends to lenders. What happens is that as the borrowers make the stated energy efficiency improvements and create monthly utility and other savings, their monthly cash-flow improves. This improvement in monthly cash-flow makes the borrower an even more stable and reliable customer, less likely to present the prospect of default.
Most energy-efficient financing programs require that the borrower has a energy rating on their existing or new home. 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).