An energy efficient home will have a higher resale value than it otherwise would have.
Energy-Efficient Mortgages now widely available in the US
January 29th, 2013
EEMs can offer significant savings over time with just a minimal increase in the purchase price of a home. Brentt Taylor explains how US residents can take advantage of these increasingly popular Green Mortgages......
The primary effect of an EEM is to increase the buyer's debt-to-income ratio.
EEM stands for an Energy Efficient Mortgage. You might think that this sounds like a "green" ploy in an effort to get people to invest more in green energy, but it's actually something quite different. An EEM allows those who are looking to buy a home or refinance their current mortgage to get a larger loan than they otherwise might qualify for, in order to pay for energy efficiency improvements.
The maximum amount of the portion of the EEM for energy efficient improvements is the lesser of 5% of the value of the property and other significant standards that may apply.
The larger loan does not increase the down payment, nor does it increase the interest rate. This is simply additional money that is added to the existing loan and rolled in under the same terms as the mortgage.
These extra funds are used to make energy efficient upgrades to the home or to purchase Energy Star products. Items such as a new furnace or air conditioner would qualify for this program, as would energy efficient windows, insulation and so on.
The EEM program was introduced in 1980. EEM loans are currently sponsored by all mortgage programs that are affiliated with the U.S. federal government, including FHA, VA, Fannie Mae and Freddie Mac loans.
RESIDENTIAL ENERGY CONSUMPTION IN THE U.S.
According to the United States Energy Information Administration, residential energy consumption has declined every year since the mid 1990s. This is a remarkable change, considering the growing use of technology by the average person. There are more electronics, more televisions, more computers and more appliances in every home than ever before.
Yet despite the increase in energy-consuming devices, residential energy consumption is decreasing. This is due to several factors: the first is that more and more of these devices are becoming increasingly efficient and using less energy. This is especially true for appliances. It's hard to even find a furnace, dryer or dishwasher today that isn't energy efficient. There has also been a concerted push to swap old-style incandescent light bulbs out for less-consumptive bulbs. Every bit adds up.
Increasing awareness of energy concerns helps reduce energy consumption as well. More people are aware that they can save on their energy bills through simple upgrades or larger renovations. EEMs help fund these upgrades and renovations.
WHO BENEFITS FROM EEMs?
The short answer is that everyone benefits from an EEM. No matter which side of the real estate business a person is on, they can benefit in some way from energy efficiency.
Buyers are able to qualify for larger loan amounts with EEMs than they could with standard mortgages. This is because the cost of energy efficiency upgrades or construction is typically higher than for standard construction.
While the initial price of a home through an EEM is higher, the monthly energy costs are lower, which results in savings over time. In addition, an energy efficient home will have a higher resale value than it otherwise would have.
For sellers, an EEM is a selling point. An energy efficient home is attractive to a lot of people. It helps the home stand out from a crowd and it helps keep buyers interested. On top of all that, a buyer can look at a home with an EEM even if the cost is a little out of their price range, because the EEM offers a wider flexibility with costs by reducing expenses for the home.
Homeowners who wish to renovate their current residence may be able to do so with an EEM. The financing that the EEM provides can be used for a wide variety of energy upgrades, from wall insulation to wiring to appliances. EEMs aren't strictly limited to people who are buying or selling a home and moving into another. They can be obtained through a home equity loan as well. The renovations can be completed without the deed changing hands at all.
Eligibility for an energy efficient mortgage is offered to those borrowers who have satisfactory credit and who have enough cash to close a mortgage loan. The borrower will need a sufficiently steady income to make the monthly mortgage payments on time.
An EEM program may be set up with an FHA-insured loan. There is no upper age limit for this type of program, and no certain income level is required.
Properties eligible for an EEM loan may be either new or existing construction, single-family or multifamily residences. These homes may be in the form of a detached housing unit, townhouse or condominium, although certain restrictions may apply to the last of these.
How Do EEMs Affect Borrowing?
The primary effect an EEM has is to increase the buyer's debt-to-income ratio. With a standard mortgage, a buyer is limited to a 29 percent debt to income ratio This means his or her mortgage payments may not exceed 29 percent of their monthly income. For a buyer who makes $5,000 a month, this works out to a house worth up to about $207,000 under current interest rates.
Compare this to the same buyer with the same income with an EEM. The 29 percent is bumped up to 33 percent. This means the buyer can now afford a home worth about 236,000 dollars. That's an increase of about 29,000 dollars, just because the home is energy efficient.
HUD website offers a list of approved lenders, including banks, credit unions and mortgage companies. A potential borrower can use the search function to find the city and state for the particular lender or home location. The search criteria with this application may include the type of property and the area or location where the property is located. A list of lenders to choose from is provided.
ENERGY STAR, a joint program of the US Environmental Protection Agency and the US Department of Energy, helps consumers save money through providing energy efficient products and services. Energy Star has also created a New Homes Partner Locator that filters lenders found in different states. This partner locator provides additional information about the builders, incentives and raters who serve each state.
Brentt Taylor writes for MortgageLoan.com, a comprehensive online guide that provides premier online publication for consumer-focused news and information, financial news, consumer education materials, and personal finance tools.
'Eco-house' image courtesy of www.shutterstock.com
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