By Deborah Jian Lee, AP Energy Writer
NEW YORK (AP) — Home buying can be a maddening process. Buyers begin with pleasant images of a new life in a new abode: barbecues at that charming suburban house or glittery soirées in that condo with city views. But all too quickly they find themselves paralyzed by sticker shock or shy of loan qualifications.
For those afraid that financial constraints will dash their dream, the real estate industry has some good news: going green could deliver a much-needed financial boost.
Both lenders and government agencies are offering rewards for making homes more energy efficient. These programs can translate to substantial savings and even help borrowers qualify for larger loans. By upgrading appliances, windows or insulation, owners and home buyers can score discounts on closing costs or raise their qualifying income, among other incentives.
The Energy Credit Mortgage
Going green can save you green in the form of a discount on your closing costs. J.P. Morgan Chase & Co. will deduct $500 for adding an energy improvement to the home or for purchasing an Energy Star-rated home, which means the home meets green standards set by the government.
Bank of America Corp. offers a $1,000 credit, which can be used toward closing costs or to buy down the mortgage's interest rate. Reducing rates can reap major savings over the years. For example, on a $100,000 mortgage, a $1,000 credit could cut 1 percentage point — or roughly a quarter of a percent — off the interest rate. Based on an original rate of 5.125 percent, this could lead to total savings of around $10,000 over the life a 30-year fixed-rate mortgage.
The Energy-Efficient Mortgage
With this type of mortgage, borrowers can bundle the cost of green improvements into the loan and can add projected monthly energy savings to their qualifying income. Raising qualifying income can help land a bigger loan. Folding the investment into the mortgage lets the borrower pay for renovations over the life of the mortgage, side-stepping hefty upfront costs.
An EEM is different from a traditional mortgage in two key ways: an energy professional conducts an energy audit on the property and the lender completes some extra paperwork, typically an energy addendum form.
An energy auditor determines whether the home meets certified efficiency standards or if it needs to be upgraded. For homes short of standards, the auditor can recommend improvements and quantify future energy savings. The audit can cost up to $400, but some lenders and green brokerage firms offer discounts or even foot the bill.
Experts say the most common recommendations include weatherproofing, adding insulation and upgrading the heating and air conditioning system.
"The standard rule for these products is they have to save more energy than they cost," said one EEM expert, Steve Baden. For example, if financing your green renovations will tack another $25 on top of your monthly mortgage payment, the savings on your monthly utility bill must be at least $26.
"Per month you have greater cash flow," said Baden, who is the executive director of the Residential Energy Services Network (RESNET).
A number of these mortgage deals are offered by states, the federal government, and lenders, including those who sell loans to Fannie Mae and Freddie Mac. Both the Federal Housing Administration and the Veteran's Administration have EEM programs. A searchable list of FHA-approved lenders can be found at http://www.hud.gov/ll/code/llslcrit.cfm. In Maine and Colorado, Energy Star runs a pilot mortgage program that requires participating lenders to provide substantial financial benefits to borrowers buying green homes.
These kinds of mortgages have been around for decades, but haven't been heavily promoted. Shelly Fagin, founder of The Green Mortgage Co. chalks this up to a lack of awareness and, for some lenders, reluctance to take on more paper work for no added pay. But taking that extra step could mean the difference between a borrower qualifying for a loan and a customer walking away from a lender empty handed.
RESNET's Baden hopes these programs get a boost from the pending American Clean Energy and Security Act of 2009, which includes provisions aimed at promoting EEMs. The controversial bill narrowly passed the House in June and awaits senate approval.
These mortgages don't suit everybody. Borrowers, especially those with sizable debt or who plan to live in their new home for just a few years, should really crunch the numbers with their lender.
Homeowners shouldn't rush to pour big bucks into greening up old houses that can't effectively be renovated or refinancing just to get an EEM. Energy Star's Brian Ng said the holder of mortgage with a low interest rate may not gain much from refinancing simply for an EEM, given the pricey closing costs and the possible increase in interest rate.
The federal government offers tax credits for a number of energy efficiency purchases. Get the details here: http://www.energystar.gov/index.cfm?c=tax(underscore)credits.tx(underscore)index.
Find out the litany of incentives each state extends to eco-friendly homeowners by perusing this site: www.dsireusa.org.
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