Does a Green Mortgage Mean Go?

Don’t recycle? Not a big fan of the rainforests? You may change your tune and become an environmentalist … at least when it comes to financing your home. Potential home owners are beginning to see the advantages of Energy Efficient Mortgages (EEM) due to their lower monthly utility bills and the ability to qualify for larger home loans down the line, enabling individuals that may have been priced out of the rising housing market to buy larger and better homes.

Details of an EEM

Traditional mortgages are calculated based on a person’s debt-to-income ratio. It’s recommended, according to financial advisors, that you say should try to keep mortgage payments below 28% of gross income. Debt of any kind - from student loans to car loans to credit cards - shouldn’t exceed 36% of gross income. Based on this ration, and with skyrocketing housing prices, some home buyers may not be able to qualify for their dream homes.

Enter “green” mortgages. They’re based on the following premise:

• A more energy efficient home will result in lower monthly utility bills. Since a person will be paying less in utility bills, that savings translates into income, allowing a homebuyer to qualify to buy a more expensive home.

By increasing borrowing power, an Energy Efficient Mortgage allows borrowers to fold the costs of energy improvements – such as a new furnace or improved insulation — into the total mortgage amount. Consquently, a person can borrow up to 15% of the home’s value to spend on improvements. That money is held in escrow to be used to pay the cost of making the home more efficient.

Sam Rashkin is the national director of Energy Star for homes (a division of the Environmental Protection Agency). He states that, while green mortgages have been around since the late 1970s, consumers have generally shied away from this sort of financing. It can be complicated for individuals to understand, for starters, and mortgage lenders used to be reluctant to offer green mortgages because, until 2003, lenders were forced to underwrite the loans individually and the forms and processing became overwhelming.

Fannie Mae, however, one of the largest providers of green mortgages, revamped its program by making it compatible with the Desktop Underwriter software that most lenders use, alleviating some of the technical difficulties associated with issuing these mortgages.

Further insight into green mortgages

While Energy Efficient Mortgages still make up a tiny amount of all mortgages, demand is expected to climb as more and more homebuyers are faced with high housing prices and surging energy costs, said Jennifer Boulden, cofounder of Ideal Bite Inc., an online source of eco-friendly strategies and tips.

“A confluence of events has made caring about the environment, economically sensible as well,” Boulden said. Because the cost of heating is expected to rise this winter, the popularity of an EEM may rise soar even higher.

An energy-efficient home can save a homeowner one third to one half on home energy costs, according to the National Association of Realtors.

With the Energy Information Administration (EIA) estimating that heating bills for all fuel types will cost Americans about one-third more this winter on average, assuming typical weather and nearly 50% more if the winter is colder than normal, making your home more energy efficient can prove to be to be a smart investment.

Do you qualify for a gree mortgage?

A person can qualify upfront for a newly constructed home if it is certified by the builder that the home was designed and built to meet energy efficiency guidelines. A home energy rater can also inspect the home and issue a Home Energy Rating System (HERS) report indicating that the house meets all standards.

For an existing home, a home energy rater issues a HERS report that estimates energy savings, suggests efficiency improvements, and estimates the cost of the improvements.

Over time, an Energy Efficient Mortgage can lift the resale value of a home, said Rashkin. He said the energy savings will translate to more property value and estimated that a $200,000 home could benefit from an additional $11,000 in value from having a HERS report certify that the house is energy-efficient.

As an added incentive, homeowners will soon be able to take advantage of the Energy Policy Act, which gives tax credits to consumers who conserve energy.

“The demand is out there but banks and lenders have to raise awareness (of this product),” Boulden said. “It just makes sense for competitive lenders to begin to take the initiative and offer these mortgages.”

While heating costs are rarely an issue for anyone hoping to take out a Florida home loan, utility bills can still pack a wallop. These options may be worth considering if you’re trying to get the most out of your budget.