Energy Efficient Mortgages Can Help Homeowners Achieve Savings

By Brentt Taylor

In today's economy, looking for ways to save money and improve a home's energy efficiency are very important. Home buyers are looking for properties that are not only within their price range but also come with affordable monthly utility bills. However, finding the funds to make energy-saving improvements can be difficult. Many homeowners and home buyers do not realize that they could qualify for an Energy Efficient Mortgage (EEM) backed by the Federal Housing Administration (FHA).

Started as a pilot program in five states in 1992, and expanded to all 50 states in 1995, EEMs allow homebuyers to roll the cost of making energy-efficient improvements into their mortgage at the time they apply for their loan. Current homeowners can also qualify, either as a separate loan or as part of a refinancing packaging. The goal of EEMs is to help homeowners improve the energy efficiency of their homes, reducing overall energy consumption and a family's carbon footprint while helping them save money each month.

Types of Energy Efficient Mortgages

There are three available types of EEMs today:

> Conventional EEM is the most powerful kind of EEM as it allows borrowers to get 15% of the home's appraised value to make the improvements.

> Federal Housing Administration EEM is another kind of EEM. While you can take the advantage of the benefits of FHA Financing, the maximum amount you can borrow is lesser of 5% of the value of your property; 115% of the median area price of a single family dwelling; or, 150% of the conforming Freddie Mac limit

> The last kind of EEM is the Veteran's Association EEM. This is similar to FHA EEM but only available to the qualified past and present military personnel. This type grants the borrowers an additional $3000-$6000 on borrower's mortgage regardless of the property's value.

Read more about this program in the ENERG Star.

Average Household Energy Usage

Heating and cooling account for approximately 60-70% of the average American home's overall energy use, but about 60% of today's homes are not properly insulated. Simply updating insulation can save homeowners around 20% on their heating and cooling costs, or about 10% of their total energy bill, each year.

Additionally, the Department of Energy estimates that energy loss due to outdated, drafty windows can account for 10% - 25% of a home's energy costs. Upgrading to even the most basic double paned windows can reduce heating bills up to 24% annually in cold climates and up to 18% in warm climates.

Upgrading to more energy efficient appliances can also help achieve significant savings. A new Energy Star-rated dishwasher will use up to 1,200 fewer gallons of water each year, and a programmable thermostat could reduce a home's energy bills up to $180 annually.

Energy Consumption today

Based on the newest data of 2009 RECS or Residential Energy Consumption Survey, released last June of this year, results has shown that the average energy consumption of the American household has remained stable due to the improvements in energy efficiency for proper insulation. This has led to decreased residential energy consumption despite the increase in the number and size of housing units.

According from the first result of EIA's 2009 Residential Energy Consumption Survey (RECS), more households have been using energy efficient features compared to the previous result RECS 1993 has shown (e.g from 36% in the 1993 survey, 58 % from 2009 RECS said that they are now incorporating materials and apliances for their homes).

See the newest data from US Energy Information Administration here.

Qualifications for an EEM

In order to qualify, a home buyer or homeowner must meet the criteria for FHA-backed financing. The loan must be made through an FHA approved lender. In addition, the total cost of the energy improvements must be cost effective, meaning they have to be less than the present value of the the cost of the energy saved as determined through a Home Energy Rating System (HERS). A HERS report, which is prepared by a qualified energy consultant, will include the home's current rating index, any recommended improvements and the cost of those improvements, the expected savings and the home's anticipated energy rating index after improvements. The cost of this report can be included in the final mortgage.

Once approved, the funds for the EEM are set aside in an escrow account. After the improvements are made and inspected, the funds are relased to the homeowner for payment and the amount is then rolled into the existing home loan. The monthly mortgage payment will increase, but this should be more than offset by decreases in utility bills.

A home is a major investment. Improving it's energy efficiency can not only increase it's overall value, but provide the homeowner with a more comfortable, affordable living environment for many years to come. Contact your FHA lender to determine whether or not an EEM is the best financing tool for your situation.

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