A green mortgage — also known as an energy-efficient mortgage — is different than a conventional mortgage in that it allows borrowers to finance certain green improvements at the same rate and terms as their home purchase. For many homebuyers this could mean making environmentally-friendly upgrades sooner than they might otherwise be able to afford, while also reducing their monthly energy costs.

Here is what you need to know about green mortgages and financing a home purchase.

How energy upgrades are rolled into a housing loan
If the home you’re considering needs various energy-efficient upgrades, as many houses do, it pays to see what a green mortgage can offer. In the past, buyers may have walked away from a home purchase because the windows were in rough shape or because the water heater was old.

With an energy-efficient mortgage, homebuyers can finance these types of improvements on better terms.

The U.S. Department of Housing and Urban Development, one of the entities that offers energy-efficient loans, cites the example of a couple who bought a California home for $150,000. They got an FHA loan for 95% of the property’s value. Based on estimates from a required home energy assessment, the lender set aside an extra $2,300 for the improvements, bringing the total loan amount to $144,800, from $142,500. The couple’s monthly mortgage payments rose by $17, but they are saving $45 a month due to lower utility bills.

To be sure, green mortgages won’t be appropriate for everyone. This includes consumers who are buying a new construction or a renovated house that’s Energy Star-certified.

The Inflation Reduction Act and home improvements
The Inflation Reduction Act — an expansive climate-protection effort by the federal government — makes green improvements even more advantageous for would-be homebuyers.

For example, if a home needs a new air conditioning unit, instead of replacing it outright, a prospective buyer might instead consider installing a heat pump and rolling the cost into a mortgage.

The homeowner could then be eligible for a tax credit of up to $2,000 and a rebate, depending on income, that amounts to 50% to 100% of the unit’s cost up to $8,000.

Financing requirements and restrictions

There are restrictions on what can be financed, and there are caps on what can be included in a green mortgage.

For example, Fannie and Freddie Mac’s specifications say that the maximum available energy financing is 15% of the “as completed” value of the property, which is the appraised value of the home once the upgrades are finished. So, under these programs, an eligible buyer with a home valued at $100,000 after upgrades can receive up to $15,000 from the mortgage transaction.

There’s also an extra step that typically has to happen before financing is approved. That is a home energy assessment by a trained professional to analyze the home’s energy usage and recommend energy-saving improvements. The evaluation projects the cost and potential savings for each improvement.

Additionally, to comply with the terms of the mortgage, homeowners have to be committed to finding contractors and completing the work on an existing structure in a set period of time, generally three to six months.

Refinancing into a green mortgage
Existing homeowners looking to make energy-efficient upgrades may also want to consider refinancing with a green mortgage to include the cost of the updates.  

Call us at (480) 205 2234 to get more information on current mortgage rates.