The Energy Efficient Mortgage: Soon to become a household name

Imagine buying a car without knowing what kind of gas mileage it gets. That, say brokers at one local mortgage company, is akin to buying a house without knowing its energy efficiency rating.

"When people buy or refinance a home, of course they consider price, location, and interest rates but nobody thinks about how much its going to cost them to actually live in the house once they move in," said Kirstin Policastro, green mortgage specialist at American Nationwide Mortgage Co. in Traverse City. "That's all going to change."

The rising costs of virtually all forms of energy have made economic conditions favorable for a once obscure mortgage product to explode in popularity. The Energy Efficient Mortgage, available through the Federal Housing Administration, Veterans Affairs office, Fannie Mae, and Freddie Mac, has been available to home buyers in various forms as early as the 1970s, but because of low energy costs, complex financing regulations, and confusing paperwork, it never really caught on with consumers or the financial industry.

Then in 2003, the program was revamped and the application process was simplified. In 2008, energy costs rose steeply, dramatically increasing the value of any investment homeowners or builders made to increase the efficiency of new or existing homes. At the same time, the real estate market was flush with homes for sale, encouraging real estate agents to look for innovative ways to sell properties. All of these variables make the Energy Efficiency Mortgage "a no-brainer," according to Policastro.

"No one can afford to be in the dark about how much it costs to heat, cool, light and run their homes any longer," she said. That's why she's predicting that the Energy Efficient Mortgage is about to become, appropriately enough, a household name.

Here's how it works:

A prospective buyer signs a purchase agreement on the property they'd like to purchase. Only primary residences are eligible for the product. If the property is a new construction, certified by the builder as designed and built to meet energy efficiency guidelines, the property might already qualify for an Energy Efficient Mortgage with no further inspections or ratings.

If the property is an older, more inefficient home, an energy inspection is required to determine a HERS (Home Energy Rating System) rating. A HERS rating is a comprehensive report by a certified energy inspector that details the property's inefficiencies and recommends both the improvements and the estimated costs of those improvements. Examples of these include added insulation, new windows and upgrading appliances. The cost of a HERS inspection can run between $300 and $600, and is normally paid for by the buyer or seller or added to the closing costs. Two area companies are currently certified to provide HERS inspections, Northern EverGreen Services of Traverse City and Paradigm Energy Services of Emmet County.

The costs of these improvements, up to five percent of a home's value or a maximum of $8,000, are added to the mortgage and escrowed at closing by the mortgage underwriter but do not affect a borrower's debt-to-income ratios. This means that with the promise of lower utility bills, buyers can qualify for more home than they would be able to without the Energy Efficient Mortgage. Buyers can finance 100 percent of the cost of energy improvements and need to provide no additional down payment.

Energy efficient repairs and updates are made by a licensed contractor of the buyer's choosing, and the contractor is paid from the escrow account after the work is completed.

When the process is complete, the buyer has instant equity in a home that is more energy efficient, leading to lower utility bills. The home is also more saleable in the future because of these improvements.

"There's a lot of stuff you can do for eight thousand dollars," said Ric Evans of Paradigm Energy Services. "A new refrigerator, an energy efficient furnace, new appliances and more insulation are all possibilities. There's a dollars and cents factor to this that people will see in the very first month they're in the home."

The Energy Efficient Mortgage, which is also available for refinances, is still relatively unknown amongst northern Michigan buyers, sellers and realtors, but Policastro and the rest of the brokers at the local office of American Nationwide are trying to change that. They've conducted free seminars for area real estate companies and the Traverse City Area Chamber and are willing to speak with any group interested in "greening" the area's mortgage applicants. BN