This article is a collaboration of information from Aaron Lubeck, author of Green Restorations (New Society Publishing); Hugh Page, senior mortgage consultant, FM Lending and Pat Daley, broker, Fonville Morisey Realty.
An Energy Efficient Mortgage (EEM) recognizes the energy efficiency and cost effectiveness gained when a home undergoes energy-saving improvements. An EEM raises your monthly mortgage payments because you are likely rolling your energy improvements into the home loan, but it also may help lower your gas, energy and water consumption. By investing up front, you’ll enjoy lower energy bills down the road. Monthly savings depend on the home’s efficiency, square footage and geography.
To determine a home’s energy efficiency, a qualified energy consultant or an accredited home energy rater provides a Home Energy Rating Score (HERS). A HERS rating is based on a 100-point scale using the 2006 International Energy code as a baseline. The lower the score, the more energy-efficient the home is. For example, a home with a HERS index of 70 is 30 percent more efficient than one built to a minimum building code.
Home operating costs include all costs to run your home. The most obvious operating costs are utilities such as electricity, water and fuel. Based on your HERS rating, energy-efficient improvement recommendations could include Energy Star appliances, duct sealing, programmable thermostats, solar hot water systems, improved attic insulation and solar technologies.
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With an FHA Energy Efficient Mortgage, a borrower can finance up to 100 percent of the cost of eligible energy-efficient improvements into a regular FHA mortgage, subject to certain dollar limitations, without an appraisal of the energy improvements or additional credit qualification of the borrower. The included mortgage energy efficient improvements must be cost effective and the total cost of the improvements (including maintenance costs) must be less than the total present value of the energy saved over the useful life of the improvements. All improvements must be completely installed within 90 days, if they are to be listed in escrow at closing.
Mortgage interest deductions and tax credits are always powerful and positive incentives for homeowners. A mortgage interest deduction is a Federal tax incentive that encourages home ownership, allowing homeowners to deduct mortgage interest on their Federal and State income tax returns.
If you are remodeling an historic home be sure to use Federal historic rehabilitation tax credits for design and consultant fees as well as for walls, floors, ceilings, permanent coverings such as paneling, structural elements, repair of windows and doors, HVAC, plumbing, electrical wiring and lighting fixtures, chimneys, and stairs.
As a further incentive, existing energy efficiency tax credits have been extended to Dec. 31. Tax credits have gone up from 10 to 30 percent of qualifying costs, with a $1,500 maximum per year. Certain rules and qualifications apply, so check with your tax professional for assistance. Home Star legislation aims to increase the energy tax credit annual limit from $1,500 to $8,000.
Energy Efficient Mortgages also allow appreciation with declining market risk should the homeowner decide to sell. Home appreciation is defined as the rise in an asset’s value that the owner can realize through refinance or a sale. Under the current U.S. tax code, sellers are allowed to realize a tax free gain of up to $250,000 for single ownership and $500,000 for married couples, so long as they have lived in the house for two of the past five years, and it has not been a recent rental.
In order to qualify for tax credits, homeowners must save all of their Energy Star labels, all sales receipts and manufacturer’s certification statements. The results are worth the extra organizational time: Duke Energy and Progress Energy offer discounts in perpetuity to those who have earned the Energy Star certification.
Resale home buyer, Allison Arpin says, “The EEM is a great program — I will be able to reduce my impact on the environment and significantly reduce my energy bills. After completing the energy upgrades recommended Southern Energy Management, I have the potential to cut my energy bills in half!”
FM Lending Services is an FHA approved HUD lender for the EEM program and its mortgage program may be used with an existing home sale, new construction or as part of an existing mortgage refinance.