Most homeowners and potential homebuyers already know that the Inflation Reduction Act included a lot of tax credits and rebates for energy-efficient home improvements. But depending on your income and the type of home improvement you’re considering, electrifying and upgrading your home will still require cash upfront.
Enter the green mortgage. Also known as an energy-efficient mortgage, this loan type, offered by most mortgage lenders, rolls the cost of energy-efficient upgrades into your existing mortgage. Whether you already have a mortgage on a property you own, or you’re looking to buy a house that could use some improvement, a green mortgage could help you lower your carbon footprint, make needed upgrades more affordable—and lower your utility bills. General contractors could also use green mortgages as a business opportunity, helping them to guide potential customers towards another way to finance a green renovation project.
A green mortgage lets you roll the cost of energy-efficient upgrades into a standard mortgage—so you’ll take this type of loan out when you’re buying a home or refinancing. Green mortgages can be added to most types of mortgage loans, including FHA loans, VA loans, and conventional mortgages. Each type of loan has its own requirements for how much you can borrow and what types of home improvements will qualify—for an FHA loan or conventional loan, for example, you can finance up to 15% of the projected value of the house after the renovations are done; for a VA loan, you can finance up to $6,000.
A green mortgage could help you lower your carbon footprint and make energy-efficient upgrades more affordable.
The idea behind these loan programs is that you’ll add a little bit to your total loan amount, which means you’ll also increase your monthly mortgage payments, but you should recoup those costs in lower energy bills once the renovations are done. Typically, you’ll have to get a home energy audit as part of the application process. This assessment will determine what upgrades are needed and estimate how much money you could save on energy bills once these projects are complete. The lender will then factor these projected savings into their underwriting process for approving your total loan.
A green mortgage could be an ideal tool for a homebuyer who’s struggling to find an affordable move-in ready home in this tight housing market. WIthout a green mortgage, a cheaper, older home that needs a new HVAC system, new windows, new appliances, or other upgrades might still be out of reach if you don’t have sufficient cash to cover both a down payment and those renovations. With a green mortgage, you could potentially roll all those renovation costs into your mortgage, paying for them slowly over time while you enjoy your new-to-you, renovated home. Financing these upgrades could pay off both in the short term, through lower energy bills, and in the long term, by increasing the value of your house.
Green mortgages are designed for situations where renovations or upgrades will lead to noticeable savings on energy bills.
Not many people are refinancing these days, because interest rates are so much higher than in recent years, but if you’ve bought a home since rates started rising, and you want to make some energy-efficient improvements, refinancing into a green mortgage could make sense. If your new interest rate would be about the same as your current rate, and you don’t have the cash to pay for these upgrades out of pocket, refinancing could allow you to make improvements that will make your home more comfortable and save you money on your energy bills. Just don’t forget about closing costs—you’ll want to be sure that you can cover those through your savings over the life of your loan.
Even if you’re financing the total cost of your renovation project with a green mortgage, you can still claim tax credits and rebates for your energy-efficient upgrades through the Inflation Reduction Act.
Keep in mind that, even if you’re financing the total cost of your renovation project with a green mortgage, you can still claim tax credits and rebates for your energy-efficient upgrades through the Inflation Reduction Act. Make sure you factor those savings in when you’re doing the math on whether a green mortgage makes sense for your situation.
Of course, these loans won’t work for everyone. If you’re buying a home that’s pretty energy-efficient already, you may not be able to get a green mortgage for one or two small upgrades. Green mortgages are designed for situations where renovations or upgrades will lead to noticeable savings on energy bills. If you bought or refinanced your home a few years ago when interest rates were historically low, it probably won’t make sense to refinance into a higher-rate loan just to make a few upgrades. In that case, you’d be better off saving up until you can afford to pay for renovations out of pocket—with help from the IRA’s tax credits and rebates, of course.
Many homeowners and homebuyers don’t know about the green mortgage option. They may assume they can’t afford a renovation project, or will have to wait until they can save up the money to pay out of pocket. If you’re a contractor with experience working on energy-efficient upgrades like heat pump installation or weatherization, green mortgages could be a great tool to help you close more deals.
Ask potential customers if they’ve thought about a green mortgage as a financing option. (Real estate agents in your network can be a great way to start these conversations.) Share information about green mortgage loans on your website or social media. Help connect potential customers with home energy auditors who can get the ball rolling on a green mortgage.
Making energy-efficient upgrades more affordable for more people is a win for everyone: the contractor who gets the business, the homeowner who enjoys a more comfortable home—and saves money—and everyone on the planet. Green mortgages are a great tool that can help reduce the carbon footprint of our built environment, and every step taken to reduce carbon emissions is a win for us all.
