Energy Efficient Mortgages Can Lower Cost of Home Ownership

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Energy efficiency is especially important todayy. While the media focus on the price of gasoline, the cost of other forms of energy, such as heating oil and electricity, are also on the rise. That's where Energy Efficient Mortgages, usually referred to as EEMs, come in. EEMs are available for conventional loans through programs offered or sponsored by Fannie Mae and Freddie Mac, publicly held corporations that buy mortgages from lenders, as well as by the U.S. Department of Energy and the Environmental Protection Agency. They are also available for government-backed loans, such as those guaranteed by the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA). Before looking at the various loan programs and what they can mean to you and your monthly mortgage, gas and electric bills, let's look at energy use and how reducing it can help you qualify for a more expensive home.

According to experts at the U.S. Department of Energy, the average homeowner in the U.S. spends close to $1,300 a year on utility bills. They say that an energy-efficient house—whether built that way or upgraded—can reduce that annual cost by 10 to 50 percent, or $130 to $650, a year. Now that's fine and good for government reports, but who among us lives in a statistically " average" house? While some homes have energy costs way below average, others are way, way above average.

As we all know, location and the weather are the biggest determining factors of our energy costs. The northernmost city of the nation is Barrow, Alaska, a mere 40 miles away from the Arctic Circle, in the land of the midnight sun and freezing winters that seem to last forever. According to http://homeenergysaver.lbl.gov/, a U.S. Department of Energy web page, the average energy costs there are $2,107. The other weather extreme is Death Valley, California, where the temperature set a national record by hitting 134 degrees on July 10, 1913. The average energy costs there are $1,463 a year. If you're looking for a big city, check out Chicago—$1,648 a year. If you're looking at " paradise," in Honolulu it's $4,272.

Many of these costs are affected by personal taste, as well. Do you turn on the air conditioner as soon as the thermometer hits 80, or do you open windows? Do you raise the thermostat in the winter or put on a sweater? How well insulated is the home you're looking at? Does it have single- or double-pane windows? Are the walls and the ceilings well insulated? How efficient is the heating and cooling system? The water heater? What is the energy rating? You can ask an accredited home energy rating system (HERS) inspector to tell you what your costs will be, and how you can cut those costs through more efficient energy use. This can be accomplished by making specific upgrades, repairs or additions. In many cases, you can use an EEM to pay for them.

That brings us to the two types of EEMs—one for new homes and one for improving existing ones. Most lenders who handle EEMs make both types of loans. To learn more about government-backed EEMs, go to http://www.hud.gov or http://www.va.gov/. There also is information available from the U.S. Department of Energy EEM site at http://www.eere.energy.gov/. Type " energy efficient mortgage" into the search box. Now let's look at how the FHA program works.

If you need to borrow $100,000 to buy a home, FHA would allow you to add up to 5 percent or another $5,000 for energy enhancements. The upper limit is $8,000. That money has to be used to make the home more energy efficient and there are guidelines that must be followed, such as having licensed contractors do the work, and having that work inspected.

If you buy an energy-efficient home, FHA will let a lender stretch your debt-to-income ratio by 2 percent because your monthly utility bills will be lower. You also can increase the maximum FHA loan limit (which varies depending on location) by as much as 20 percent to buy a home that either has, or will have, solar panels. VA has its own program that allows similar loan increases to cover the costs of making the home more energy efficient. The Department of Energy and the Environmental Protection Agency jointly operate the Energy Star Mortgage program that works with numerous homebuilders. Lenders can stretch the debt-to-income ratio by as much as 4 percent for EEMs, and they can add other incentives such as lower interest rates, discounts on closing costs or loan origination fees, and paying the cost of the home energy rating. Fannie Mae and Freddie Mac have similar programs.

What do all these energy-saving measures on a home mean to you? If you can reduce your home energy costs by even $50 a month, for example, you will have an extra $600 a year. This is yours to save, to spend, to put back into your home or even pay down your mortgage. No matter what you do with it, it can be yours with the help of an Energy Efficient Mortgage.