Home Buying or Refinancing? Get an Energy Efficient Mortgage!

Interest rate 7.5%, downpayment of 10%, 30-yr, principal & interest only

Rarely do I encounter no-brainers in the world of energy efficiency (unless I'm talking programmable thermostats).  The answer is usually, "It depends on where you live" or "Does the mercury bother you?" or "Will you stay in the home long enough to realize the payback?", but I've found an energy-efficient no-brainer (EENB for short...and yes, I made that up).  It's called the Energy Efficient Mortgage (EEM) or Energy Improvement Mortgage (EIM).

I first heard about these from Allison Bailes when he wrote about the Energy Efficient Mortgage on his Energy Vanguard blog. From his post:

The EEM is offered by FHA (HUD), VA, and Fannie Mae, with FHA doing most of the business in this arena. When you decide to go with an EEM rather than a conventional mortgage, you benefit by:

  • Qualifying for a higher loan amount because of increased energy efficiency
  • No down payment for the home energy efficiency package
  • Getting a more comfortable and energy efficient home

The beauty of using an energy efficient mortgage is that you get a house with a higher up-front cost, but, because you're financing that cost and the operating expenses are lower, you end up saving money from the first month you're in the house.

And that's why the EEM is a no-brainer; there is no payback period, it pays for itself right away, that is if you made the right energy efficient decision and didn't just install a geothermal heat pump for your dog house.  You can get an EEM with your first mortgage on the house or if you refinance your home.

(Pay attention, this next paragraph is important!)

As Energy Star discusses in their article on the Energy Efficient Mortgage, you need to get a Home Energy Rating by a Home Energy rater (link to RESNET) before you can apply for an EEM.   On the RESNET link, they have an option to use a drop down box to search for Home Energy Raters (HERS) by your zip code.  Use this tool, and when you find a HERS rater you like, ask them if they know how to process an Energy Efficient Mortgage.  If they say, "No way Jose", hang up and try the next one on the list.  (If you are a HERS rater who doesn't know diddly about an EEM and you don't like the previous sentence, I advise you learn how to process an EEM asap).  Here is our post explaining the HERS Rating.

As I just alluded to, the biggest issue with Energy Efficient Mortgages is that nobody seems to know about them!  Allison addressed this in another post on the topic titled, "Why is the Energy Improvement Mortgage so lonely?".  This was a great post by Allison, but the most informative piece I took from it was when Jason Payne (an expert on the topic and partner with Allison in some education efforts on the topic) responded to a comment by someone who felt that the EEMs "seem like a fake product" because he didn't find anyone who knew about them.  Jason's response:

Any lender who provides FHA or VA loan products is able to complete an EEM, provided they have at least 2 investors who buy them. Fannie and Freddie also have a form of the EEM available, but with a few more stringent guidelines. An experienced HERS rater who is properly trained in the intricacies of these loans is the most important factor in EEMs closing successfully.

We have facilitated many EEMs over the past year, including my own house, and they have gone through multiple lenders who had never seen one before. The vast majority of lenders can do EEMs, but they just don't know it. They shy away from them because most loan originators have not encountered EEMs and do not understand the energy package reports, and they are unsure of the steps and documentation involved in validating the increased mortgage value for underwriting approval.

Since hardly any lenders have even attempted an EEM, it stands to reason that underwriting hasn't had any experience with them either. I have had to educate several underwriters (even HUD itself) on the guidelines to point them in the right direction. My HERS reports adhere to the underwriting guidelines, and in the end, all of them have been approved without any closing delays. Several of these lenders are so excited at how easy it is that they are productizing it internally.

My wife and I refinanced with an EEM in September, and we couldn't be more pleased with the results. We went from 6.375% to 4.5% on our interest rate. We were able to add in $10,750 to the loan for energy improvements; High Efficiency heat pump, heat pump water heater, Icynene on the roofline and foundation walls. In the end, we are projected to save $120/month in energy costs, our mortgage payment went down by $130/month and we received just under $5,000 in cash rebates and tax incentives. Not to mention things are much more comfortable and quiet throughout the house. It's really an incredible deal!

I didn't know about the Energy Efficient Mortgage when I purchased my town home, but in a few years I plan on helping to design and build a super energy efficient home of my own, and I know I will be looking into the EEM!

For more information check out HUD: Energy Efficient Mortgage. also has a good section on the Energy Efficient Mortgage.

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I have been pushing my CEO to start a program that we would handle internally. In my search for competitors that advertise this product I was amazed to find absolutely none in my immediate market area. The only one was another credit union that would lend 15k for 60 months, but with no lien, hence a high rate. When I called my rep for our secondary market lenders I got nothing but "I dont know" and "I dont think so". I am a HUGE advocate of geothermal and solar power (using enphase micro inverters). I would love to do both on my 1984 home but the costs are just so high its immpossible. So the golden question: How do I get my CEO to approve this? I have a rough draft of the program and would love any advice.
You got it, Chris. You emphasized exactly what I think are the two most important points about EEMs - that they're a no-brainer (or EENB!) and that we've got to get the word out because so many people could benefit from them but just don't know about them.

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