Mortgage Companies Offer 'Energy-Efficient' Home Loans
By Timothy C. Barmann, Providence Journal
R.I. Knight Ridder/Tribune Business NewsMar. 29 - Car buyers usually consider how many miles per gallon a vehicle gets before buying it. But homebuyers rarely consider the energy efficiency of a house, even though it can have a big impact on monthly expenses.
Mortgage companies are now offering loans designed to change that way of thinking. Fannie Mae, the Washington, D.C.-based private mortgage lender is now offering an "Energy Efficient Mortgage" in Rhode Island and in other states. The program is being handled through Sovereign Bank and Countrywide Home Financing.
An Energy Efficient Mortgage allows a homebuyer to borrow extra money beyond the purchase price in order to make a house more energy efficient.
That could include installing more insulation, sealing windows, or a host of other improvements.
Such changes could have a huge impact on monthly utility expenses, said Michelle Desiderio, senior product developer for Fannie Mae.
"I've heard of people saving $200 a month, sometimes more," she said.
"Plus there's being in a house that's much more comfortable."
The less money a homebuyer has to spend each month on utilities, the more he or she will have to pay on a mortgage, thus allowing a larger loan.
The idea behind making a house more energy efficient as a way of saving money isn't new. And it certainly can be accomplished with other types of financing, such as a home-equity loan.
The main benefit of getting an energy-efficiency mortgage is that a borrower may be able to obtain a larger loan than what he or she would otherwise qualify for. That's because with this type of mortgage, the lender will increase a borrower's income because less will be spent each month on utilities, freeing up more money for mortgage payments, Desiderio said.
An energy-efficiency mortgage does not provide any break on the interest rate or any other subsidy, she added.
It would be most attractive to buyers who have very little money to put down on a house, or to those who are taking out a new mortgage or refinancing an old one and want the convenience of including the costs of making efficiency improvements, Desiderio said.
Adding efficiency-upgrade costs to a mortgage can result in lower overall monthly housing expenses.
Here's an example from Fannie Mae: Let's say you are purchasing a house for $250,000, with a 20-percent down payment. A $200,000 mortgage for 30 years at 7 percent would make the monthly payment (without property tax and insurance) $1,331. Add in an estimated $120 in monthly energy expenses and total monthly expenses are $1,451.
With an Energy Efficient Mortgage, let's say the improvements cost $2,400, bringing the mortgage amount to $202,400. Monthly payments would be $1,347, or $16 higher each month.
Now take into account the savings on utility costs. In Fannie Mae's example, those monthly expenditures drop from $120 to $60. The net expense is $1,407, which is $44 less than the $1,451 payment without the efficiency improvements.
One of the key differences with an energy-efficiency mortgage is that the buyer needs to obtain an energy-efficiency rating for the house being bought. This is a sort of miles-per-gallon rating of a building, and it ranges from 1 to 100, with 100 being the most efficient. A certified energy rater must perform the analysis, which typically costs $200 to $400, said Desiderio of Fannie Mae.
An energy-efficiency mortgage may not be the best solution for homebuyers who want to make efficiency upgrades. A downside is that the borrower will be paying interest on the extra money borrowed for the life of the loan, possibly 30 years. It may make more sense to take out a home-equity loan, which could have a lower interest rate, and pay off the loan quicker to reduce interest costs.
And if a borrower can get a traditional mortgage at a lower interest rate than the energy-efficiency one, he or she might be able to save more money each month. The borrow could then invest the money saved in home upgrades without the need to finance the extra costs.
"This is obviously the case where people still need to shop around," said Kate Strouse Canada, an advocate for the Rhode Island Public Interest Group, or RIPIRG.
"The concept is a good one, I think. People should look at home-equity loans (and) home-efficiency mortgages, and figure out which one is best for them."
"It's great that banks are beginning to offer this and promote it."
Besides Fannie Mae, other lenders offer energy-efficiency mortgages, including Freddie Mac, the FHA and the VA.
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