Energy Mortgage Reality Check

No one is explaining the amounts or use of the additional money made available in an energy mortgage.  Home InSight is finding out by tripping over things with customers and agencies responsible for implementing these programs. 

A customer gave us this from HUD:

HUD Energy Efficient Mortgages

Purpose: Provides mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage.  The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.

Eligibility Requirements
1. Borrower must meet standard FHA credit requirements.
2. Borrower is able to finance closing costs and the upfront mortgage insurance premium into the mortgage.  The borrower will also be responsible for paying an annual premium.
3. Existing or newly constructed on-to-four unit properties are eligible
4. The cost of the energy efficient improvement that may be eligible for financing into the mortgage is the greater of 5% of the property's value (not to exceed $8000) or $4000.
5. To be eligible for the inclusion into the mortgage, the energy efficient improvements must be cost effective, meaning the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.
6. The cost of the energy improvements and estimate of the the energy savings must be determined by a home energy rating system (HERS) or energy consultant.
7. The cost of the eligible energy improvments may be added to the maximum mortgage amount
8. Contact your local HUD office

One the face of it, $4000-$8000 doesn't improve much, so what does it really cover?  The additional money is available to encourage energy improvements, not act in place of a home improvement loan for an addition or conversion.  It's designed to do things that will reduce overall energy cost, that might not otherwise be done due to cost, such as installing a better air conditioner or adding additional insulation.  For existing houses where additions are not being added, just about anything thing that improves energy peformance can be considered.

Additons & Conversions. What gets tricky is when an addition is added or a conversion is made.  To do either of these, the minimum building code requirements must be met.  The improvement money is intended to build it better than minimum!  For example, if you want to convert your garage into a bonus room, you will improvement performance of the existing house considerably by removing the garage doors and filling the holes with uninsulated walls and then air conditioning the area.  In this case, the energy use will increase simply because the house is bigger.  The house performs better because the faulty insulation over the garage no longer affects home performance as much.  There is no energy savings here. 

However, the miniumum building code requirements require insulating the garage walls, adding windows, and sealing holes through the walls.   This still leads to increased energy costs because the house is bigger.  The incentives are added to do better than the minimum, such as using better windows, increasing wall insulation, etc.  The difference in cost between the minimum and improvements is where the savings is to occur.  $4000-$8000 should easily help make up the difference.  This money is not intended to cover all the costs of the addition!

To figure out the difference between the minimum and improvements requires analysis.  This is where the HERS Report comes in. The cost of a HERS rating covers the analysis and required quality assurance checks on the files.  Two are required: as-is and after-improvements.

Bottom Line: The money available for energy improvements is for the HERS Report and the incremental cost of energy improvements.  If existing house components are upgraded, just about anything works.  For an addition or conversion, performance is based on improving the house per the minimum building code.  The qualifying savings is the differnce between improvements made above the minimum building code and the minimum required.

This is Home InSight's current understanding.  As this knowledge matures, it will be reflected in updates to this webpage.  If you have better information, please call to let us know today!!!