Pros and Cons of Energy Improvement Mortgages

An energy improvement mortgage (EIM) is a mortgage taken out to finance energy-saving measures in the home. Examples of EIM uses include replacing older appliances or installing extra insulation. It can be combined with the primary mortgage used to purchase a resale house, but it is only available when a home is being purchased or refinanced.

The EIM is sometimes confused with an energy efficient mortgage (EEM). However, unlike an EIM, an energy efficient mortgage is typically used to purchase a home which is already energy-efficient. By crediting the home’s existing energy efficiency into the mortage, the borrower can stretch debt-to-income qualifying ratios in order to qualify for a larger loan amount.

The pros and cons of energy improvement mortgages are similar to those associated with any other mortgage which is assumed for purposes other than purchasing a home. In every case, the return on investment (ROI) received from the mortgage funds is measured against the risk and interest of taking out a mortgage. However, an energy improvement mortgage has a few extra wrinkles.

To qualify for an EIM, an initial home energy rating must be performed by a certified home energy rater, who will also recommend energy improvements and their expected Energy Savings Value (ESV). Once the improvements have been made, they must also be confirmed by a certified home energy rater. This step ensures that the funds are used for the intended purpose, but it also carries the extra cost of inspection.

Adding an energy improvement mortgage to the main mortgage will result in higher mortgage payments. That rise is expected to be balanced out by lower ongoing energy costs after the energy improvements have been made. If energy costs drop, the savings will be less. If energy costs rise, the savings will be more.

The amount of energy savings must also be measured against the interest paid on the mortgage. In a fixed-rate mortgage, savings will be affected only by the cost of energy. Where the energy savings are higher than the fixed mortgage payments, the EIM will reliably save the homeowner money. However, in a variable-rate mortgage, the calculation is also affected by future interest rate changes. If the mortgage interest rate goes up, then it can completely wipe out expected energy savings during the term of the mortgage.

Long-term home resale value does increase with energy savings. A study in the Appraisal Journal has found that the market value of a home increases on average by $20 for every decrease of $1 in annual energy costs.

It may be difficult to find a lending institution that is open to the idea of energy mortgage options. Some lenders may not be aware that energy mortgage options are available. However, this is likely to change as more institutions discover that energy improvement mortgages are good investments. A homeowner who invests in an EIM is committed to his home.

Unlike energy efficient mortgages, energy improvement mortgages are not sponsored by the Federal Housing Association, the Veterans Administration or the secondary mortgage markets Fannie Mae and Freddie Mac. The FHA caps EEMs at 5 percent of the value of the property unless the property is valued above the median area price of a single family dwelling, in which case the cap is based on the median price. The VA caps its EEMs at $6,000.