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August 03, 2005

Energy-Efficient Mortgages?

A recent article highlights yet another benefit of energy-efficient homes: they could qualify you for an energy-efficient mortgage (EEM).  Since an energy-efficient house costs less to operate, Fannie Mae, the government-established private company that backs mortgages for low- to moderate-income homebuyers, recognizes that the money saved can be spent on housing costs. Thus, it adds the projected savings to the borrower’s income, raising that income and qualifying them for a larger mortgage.  Built Green has a nice example how this can work on paper.

While the EEM has been around since 1979, it was little used until Fannie Mae reduced the complex paperwork a few years ago.  To qualify these days, a borrower must buy a new energy-efficient home--or commit to upgrading an existing home--and pass a Home Energy Rating System inspection.  The borrower then gets a one-page report to show to lenders when applying for a Fannie Mae-backed loan.

In light of my previous post about the trend towards bigger houses, I'll add the caveat that the efficiency ratings used to qualify for an EEM appear to look at the individual feature of the house--nsulation, efficient heating and cooling systems, etc.--but not necessarily the total energy use of the house. 

Ironically, then, by qualifying buyers for a larger loan, the EEM may encourage the purchase of bigger houses that could use as much total energy as a smaller, less-efficient house.  While this may help Fannie Mae customers buy as much house as they can afford, the EEM may not actually save any energy.  This issue bears considering if energy-efficient mortgages become popular offerings on the rest of the lending market.

As a side note, EEMs aren't the only green options Fannie Mae offers.  Fannie Mae is also piloting the Smart Commute Initiative for borrowers buying a home near public transit.  Similar to the EEM, this option, often called a location-efficient mortgage, recognizes the savings from living in a transit-friendly community.  Seattle is one of the pilot cities for Fannie Mae’s location efficient mortgages, although it looks like a couple lenders may offer them to all customers.  The city of Seattle even has a map showing the most efficient locations.

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Comments

Quick story:

I moved up from sunny CA and one of the studios I took at UW was to build a straw bale building in MT - great! I went out to learn the techniques so I could build a relatively inexpensive, eco house, solar gain, all that.

Many of the benefits of eco homes come from saving heating bills by various methods (more insulation, better heating methods, etc), but many heating methods are partially or largely based on solar gain.

Solar gain in the winter in the Northwest...hmmm...hmmm...

Posted by: Dan Staley | Aug 3, 2005 5:00:52 PM

With regards to...

"Ironically, then, by qualifying buyers for a larger loan, the EEM may encourage the purchase of bigger houses that could use as much total energy as a smaller, less-efficient house."

For anyone building a new home, you're right. But older homes still make up 75% of the real estate market. While I will finance new homes simply because I need to make a living at this point, I don't like promoting urban sprawl.

The problem that I've been facing as a EEM practitioner is that most people simply do not know mortgage program. I fear that until more realtors embrace this financing option, consumers will not even begin to know the first things about it.

I have success story after success story where my clients in existing homes are saving $700-$1500 per year on utilities as a result of improvements that they did, but it has continued to be a tough sell for realtors. I can only hope that as energy costs remain high, consumers will become more energy conscious and will begin to look for better choices.

Thanks for covering the topic.

Joel Wiese
http://www.EnergyStarLoans.com

Posted by: Joel Wiese | Aug 22, 2005 6:48:14 AM