A Mortgage Program That Can Also Reduce Your Energy Bills

by Keith Landis on March 14, 2011

This winter has been particularly cold in Pennsylvania.  Homes with older windows, inadequate insulation and improper air sealing have a hard time keeping out the winter chill.  High utility bills can also cost homeowners quite a bit as they try to keep their home warm.  Is there a possible solution to reduce these bills and improve the energy efficiency of the home and at the same time get a low fixed rate mortgage

         Yes! 

The FHA Energy Efficient Mortgage program (EEM), sometimes referred to as a “Green Mortgage” allows homebuyers and homeowners to make their home more energy efficient.   A great feature of the EEM is that this program enables borrowers to finance the cost of adding energy efficiency features to their home as part of the new FHA mortgage.  This program is available for both purchases and refinances and the funds for energy improvements are factored directly into the new loan amount.  This means that there is just one closing needed.

What energy improvements qualify for the EEM Program?

Any energy improvement can be included as long as the total cost of the improvement is determined as less than the total dollar value of the energy that will be saved during their useful life

Ok, I see.. but how do we know the cost of these improvements will be less than than money I save on utility bills?  How is that determined?

This will be determined by a home energy rating report that is prepared by an energy consultant using a Home Energy Rating System (HERS).   A HERS report provides an evaluation of a home’s energy-efficiency by analyzing the home’s insulation, the efficiency of the appliances, quality of the windows and comparing them with the local climate and utility rates.  An energy rating will then be assigned to the house using an index between 1 and 100. A lower index indicates greater efficiency.    Cost-effective upgrades are those which will save more money through energy savings than they cost to install.

How much will this HERS Report cost me?

A HERS report costs usually range between $300 and $800. FHA does allow for this cost to be paid by the buyer or the seller or the cost can be financed in as part of the mortgage.   Improved energy efficiency and lower utility bills often more than pay for this cost many times over.

How much money will I save with these energy improvements?

Energy efficient homes do cost less to own than non-efficient homes.  The savings on utility bills can really add up over time.  The exact amount of savings can of course vary with every EEM program as each house is unique and each house has a different opportunity for energy improvement.  The HERS report is done early in the loan process to determine possible savings and allow the lender and borrower to factor in these savings with the loan calculations.

Below is a comparison of an FHA purchase or refinance with and without using the EEM program.  This is just one example but it gives an idea of how the program translates into real savings.

                                                       No Improvements       EEM w/ 5k improve

                                                             $ 150,000                               $ 155,000
(30 year fixed @ 5% rate)

Monthly payment (Princ/Int)     $ 805                                   $ 832

Energy bills                                       + $ 250                                + $ 150

Principal/Interest payment plus
Energy bills                                          $ 1055                                   $ 982

Monthly savings                                                         $ 73  

If you currently have a home or are buying a home that could benefit from improved energy efficiency and you want to look for ways to lower your energy costs, the FHA’s Energy Efficient Mortgage may be just right for you.

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