What are green home loans?
How green mortgages promote sustainable homes.
By Asiyah Choudry
August 15, 2023
In the US, 20% of emissions come from residential energy use. But for environmentally conscious homeowners, the high upfront cost of installing energy-efficient technology can be a barrier to greening their homes. Green home loans help to reduce emissions from residential energy use by financing energy-efficient home improvements while reducing the financial burden on homeowners (and potentially helping them save money).
What is a green home loan?
A green home loan, also called an Energy Efficient Mortgage (EEM), allows buyers to purchase a home while financing energy-efficient home upgrades, such as renewable energy systems and energy-efficient appliances, through their mortgage payments. Utility savings derived from improved energy efficiency mean borrowers can afford higher mortgage payments, therefore lenders may permit a higher debt-to-income ratio. EEMs also extend to existing energy-efficient homes, enabling homeowners to refinance with more favorable terms.
The benefits of green home loans include the following:
#1: Tax Rebates
After installing energy-efficient home upgrades you may be eligible for tax credits. The Federal government offers an Energy Efficient Home Improvement Credit and a Residential Clean Energy Credit for improvements made through 2032 and 2033, respectively, with many state governments providing additional incentives.
#2: Reduced utility bills
Utility bills are not cheap. In the US, the average monthly utility bill is $429. Energy efficiency reduces your home’s demand for energy, reducing your utility bill. A simple fix like replacing your drafty windows can reduce your energy bills by 12%.
#3: Positive environmental impact
The electricity and heating sector is a top contributor to global warming, producing 25% of global greenhouse gas (GHG) emissions. By reducing your home’s energy needs, you are reducing greenhouse gas emissions. In addition, considering that the largest financial institutions are heavily invested in fossil fuels, EEMs allow you to put borrowed money to work, to the benefit of the environment.
Green home loan providers
Let’s take a look at some of the green home loan options available to buyers. The Federal Housing Administration’s Energy Efficient Mortgage (EEM) program offers FHA-insured mortgages obtained through approved lenders for borrowers who wish to finance energy-saving home improvements. Borrowers are not required to qualify for the portion of the loan designated to financing the energy-efficient improvements – only the portion of the loan designated to financing the home.
In addition, compared to conventional mortgages, EEM borrowers are allowed a 2% higher debt-to-income ratio in anticipation of future utility savings. This means that you may be able to afford a slightly pricier home without any changes to your income level.
The government sponsored-enterprises Fannie Mae and Freddie Mac have designed two additional green home loan products. The Fannie Mae HomeStyle Energy Mortgage allows borrowers to finance “up to 15% of the as-completed appraised property value” for energy efficiency, water efficiency, and natural disaster resiliency improvements. In 2022, Fannie Mae purchased $128.1 million in HomeStyle Energy Mortgage loans. Similarly, the Freddie Mac GreenCHOICE Mortgages allows borrowers to finance water and energy-efficient upgrades over the duration of their mortgage up to 15% of the “as completed” property value. If you’re interested in the HomeStyle or GreenCHOICE mortgages, you’ll need to seek out a lender approved by Fannie Mae or Freddie Mac.
Challenges and considerations
There is no one size fits all green home loan solution. While green home loans are typically similar to conventional mortgages, there are some important differences to consider.
#1: Additional requirements
Compared to a conventional mortgage, eligibility criteria may differ. For example, the FHA requires a home energy assessment to identify the most appropriate cost-saving home upgrades, adding complexity to the application process. In addition, homeowners may be required to provide proof of purchase of energy-efficient upgrades.
#2: Return on investment
While energy efficiency can save you money in the long term, it may take a long time to earn back your initial investment. You should also consider whether the interest paid on the loan will outweigh the financial savings from the home upgrades.
#3: Limited options
Not all lenders offer green home loans, so it may take additional research to identify a lender that meets your needs.
It’s best to contact lenders directly to develop a better understanding of eligibility criteria and terms in order to assess whether a particular green mortgage is suitable for you.
Investing in your home and the planet
With green home loans, borrowers can reduce emissions while saving on utility bills. However, green home loans aren’t suitable for every buyer. Fortunately, green home loans are not the only way to lower household emissions at a reduced cost. You can still take advantage of federal tax credits and rebates designed to improve the affordability of the clean energy transition.
If you are a prospective homebuyer interested in learning more about how your home can help you drive a more sustainable future, check out our list of climate considerations for homebuyers.
Please note: this article is for informational purposes only. We have not reviewed and are not endorsing the loans described herein.
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