January 21, 2009

Getting more with a Green Mortgage


It seems that 'green' is one of the biggest buzz words as of late. Its in fashion to throw 'green' in front of everything or use 'go green' as a verb. So it seems no surprise to hear about a Green Mortgage. But how can a loan be 'green'? Actually the term Green mortgage is being applied to an Energy Efficient Mortgage (EEM) which has been around since the 1970's. Basically what this kind of loan does is it will take into account the cost savings you should see from an energy efficiency home and then allow you to borrow more on your mortgage because of it. The idea is that if your home is more efficient then your utility bills will be lower so you'll have a bit more money to spend towards your mortgage. For example, if your utilities ran $200 a month and your mortgage was $1200 a month then if you instead bought a home with cheaper utility costs of just $100 a month then you would have an extra $100 each month that would help you afford a mortgage of $1300. You can get an EEM to cover existing home improvements or you can get one to cover improvements you will make after purchase.

Why would you want one?
Generally a green mortgage would be a good way to wrap expensive home improvements into a home loan so that you can finance the purchase over a long period with a relatively low interest rate. Say you are buying a home but want to upgrade the heating system, add insulation and install new energy efficient windows. Those improvements might cost you $20,000 total. If you got an home equity loan to pay for it you might be paying 6% with a term of 10 or 15 years. Your monthly payments would be around $170 to $220. But if you could wrap that $20,000 into a conventional 30 year fixed loan at 5.1% then the additional payment would be about $110.


How to get one

Ask lenders about the Energy Efficient Mortgage program. The Energy Star site has information on the loans and how to find lenders who have them.

You DO have to get a home energy rating from an auditor. The auditor will inspect the home and then write an appraisal on the energy efficiency and expected energy savings from the home. This audit will cost you some money, probably a few hundred bucks. That cost can be wrapped into part of the loan.

Then you apply for an Energy Efficient Mortgage with a conventional lender. Most lenders can offer an EEM as a conventional loan backed by Fannie Mae or Freddie Mac.



More information:
Go Green With Your Mortgage at CNN Money
How to cultivate a 'green mortgage'. at MSNBC

Photo by +fatman+

2 comments:

  1. This is just crazy. If those couple hundred dollars make the difference in your mortgage, you shouldn't be buying a house.

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  2. I certainly wouldn't use a green mortgage to afford a home you can't make payments on of course. My personal rule of thumb is that the mortgage shouldn't be more than 2.5 times your gross annual income. (see : http://freeby50.blogspot.com/2008/07/how-expensive-of-home-should-you-shop.html)

    Honestly I doubt a green mortage will be too useful for many people. At best it allows you to finance more in your home and wrap some energy improvements into the financing.

    The example that I gave was a fairly low dollar value so its hard to see the much benefit. A green mortgage might be more useful if you're wanting to add $40k worth of solar panels to a home worth $150k. If those solar panels paid all your electricity then they'd pay for themselves, but they are a major purchase and to make them affordable it might work best to include them in a 30 year mortgage.

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