Why Is the Energy Improvement Mortgage So Lonely?
About a year ago, I had lunch with someone who was in the process of refinancing his 50 year old home. He was doing the refi merely to lower his interest rate and monthly payments, but he missed out on a huge opportunity.
As we enjoyed our Thai food that day, he told me that his home had the original natural gas furnace, a 1960 behemoth that was solid and dependable. If you look at a copy of Preston’s Guide or another source of HVAC equipment efficiencies, you’ll find that a gas furnace made in 1960 has an efficiency of 60% (60 AFUE).
To put that in perspective, the standard efficiency for furnaces you can buy today is 80%. (The minimum allowed by law, though not available from any manufacturer, is 78%, but that’s another story.) High efficiency furnaces are in the range of 92 to 96 percent.
He refinanced his house with a conventional mortgage and kept the furnace. If, instead, he had refinanced with an Energy Improvement Mortgage (an Energy Efficient Mortgage for homes that need improvements), he could have replaced the furnace with a high efficiency model and come out way ahead.
I didn’t do a home energy rating on his house, but I estimated that he could have saved about $550 per year ($46 per month) on his
heating bill by going from a 60% to a 95% efficient furnace. If the new furnace and the home energy rating had cost him $6000, his mortgage payment would have increased about $30 per month.
So, he would have paid another $30 per month on his mortgage and saved $46 per month on his energy bills. Is it worth it? You bet! With an Energy Improvement Mortgage, he could have added the cost of the furnace to his mortgage and saved money from the very first month. Payback is irrelevant when you’re financing energy improvements. It’s all about the monthly cash flow.
Why, then, didn’t this gentleman get an Energy Improvement Mortgage? The reason is simple:
He didn’t know.
He’d never heard about this type of financing, and either his lender didn’t know or didn’t tell him. It’s not that they’re hard to do or cost-prohibitive. People just don’t know about them.
I’ve been on a bit of a mission to promote EEMs and EIMs over the past few years. I’ve written about them a few times here in the blog. I gave a talk on them last year at the RESNET conference and am doing another one this year. A few others in the HERS rater community who really push them as well, including Gary Smith, of Energy Rated Homes of Mississippi, and Jason Payne, of EEM Training and one of our EVER raters.
In fact, Jason is my co-presenter for the talk at this year’s RESNET conference, and we recently put on a free webinar on the EEM/EIM next week, which was co-sponsored by Daily 5 Remodel and BuilderLink. You can click the button below to download the slides from the webinar.
Photo at top by Mad House Photography from flickr.com, used under Creative Commons license. Money photo by TheAlieness GiselaGiardino²³ from flickr.com, also used under Creative Commons license.
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60% Efficiency rating on the
60% Efficiency rating on the heating unit? WOW!
To put that in perspective, that means that for every dollar you spend on heating fuel (your gas bill) 40% of the money never makes it into your home.
gs
Yep, 60%. Having a pilot
Yep, 60%. Having a pilot light is one reason it’s got such a low efficiency, but 50 years ago, they probably considered 60% efficient pretty good.
Of course, that 60% applies only to the furnace itself, not the distribution system. If the ducts are leaking a lot of air outside the building envelope, he could easily be getting only 30 cents of heat for each dollar he spends on natural gas for heating.
You should have seen the
You should have seen the scary heating monster we had in our MN home in the late 90s. We had to hire a crane just to remove that thing. But we still made out ahead financially because we did the right thing. (such a proud moment)
Alexandra, I’ve seen some of
Alexandra, I’ve seen some of those scary monsters abandoned in basements and crawl spaces by people who didn’t want to hire a crane and could afford to give up the space. When you have such an old furnace, it’s almost impossible for an upgrade not to be cost effective. Glad to hear it worked out so well for you!
Allison,
Allison,
In my experience the real issue is that EEM’s don’t really exist. They’re a product of the marketing arms of banks, not their underwriters, and they don’t have true underwriting support.
I’ve tried to access them personally, as have clients, but the numbers haven’t panned out. You are limited to a very small pool of banks, and the rates on the standard FMA secondary markets are typically so much better than the EEM that there is almost no use in them as currently structured.
Until assessors start seeing increased sales values to better built houses (and not just larger or prettier) EEM’s won’t have underwriting support, and without that, they aren’t a viable product.
It doesn’t have to be this way, but they really seem like a fake product in my opinion. I would love to be proven wrong, however.
Jesse,
Jesse,
Any lender who provides FHA or VA loan products is able to complete an EEM, provided they have at least 2 investors who buy them. Fannie and Freddie also have a form of the EEM available, but with a few more stringent guidelines. An experienced HERS rater who is properly trained in the intricacies of these loans is the most important factor in EEMs closing successfully.
We have facilitated many EEMs over the past year, including my own house, and they have gone through multiple lenders who had never seen one before. The vast majority of lenders can do EEMs, but they just don’t know it. They shy away from them because most loan originators have not encountered EEMs and do not understand the energy package reports, and they are unsure of the steps and documentation involved in validating the increased mortgage value for underwriting approval.
Since hardly any lenders have even attempted an EEM, it stands to reason that underwriting hasn’t had any experience with them either. I have had to educate several underwriters (even HUD itself) on the guidelines to point them in the right direction. My HERS reports adhere to the underwriting guidelines, and in the end, all of them have been approved without any closing delays. Several of these lenders are so excited at how easy it is that they are productizing it internally.
My wife and I refinanced with an EEM in September, and we couldn’t be more pleased with the results. We went from 6.375% to 4.5% on our interest rate. We were able to add in $10,750 to the loan for energy improvements; High Efficiency heat pump, heat pump water heater, Icynene on the roofline and foundation walls. In the end, we are projected to save $120/month in energy costs, our mortgage payment went down by $130/month and we received just under $5,000 in cash rebates and tax incentives. Not to mention things are much more comfortable and quiet throughout the house. It’s really an incredible deal!
Allison and I will be talking about this project in the webinar on Tuesday. You, and anyone else, should check it out if you get the chance.
Hi Allison
Hi Allison
Thanks for the informative post. And Jason, thanks for your supplemental information. Jason, I had a couple of follow-up questions to your comment above.
1. You said in your first paragraph that “Any lender who provides FHA or VA loan products is able to complete an EEM, provided they have at least 2 investors who buy them.” Can you clarify what you mean when you say ‘provided they have at least 2 investors who buy them.’ I am not folowing that.
2. When a homeowner closes on an EEM, how does the lender (and FHA/VA) ensure that the homeowner is actually spending the extra money on the energy efficiency upgrade? In other words, say that the homeowner qualifies for an extra $4,500 to use for energy efficiency upgrades. Does the homeowner actually receive that $4,500 at closing and then is trusted to spend the funds on the energy upgrade project? Or, do the funds go to the provider doing the upgrades?
3. Related to #2 above, let’s say that I get an energy audit by an approved HERS rater. I have never had such an audit but my assumption is that he/she would give me an estimate to do certain energy efficiency upgrades. Is this the estimate that provides what amount that I would be eligible for in my EEM?
4. Are all HERS raters qualified to provide the documentation (or whatever is needed to the lender) to enable the homeowner to get the EEM? Or, do you need to seek out a rater with specific qualifications?
thanks,
Allen
Allen,
Allen,
1. I’m not a lender, but this is what I understand to be the general lending guidelines. They must have 2 investors for each type of mortgage product they offer. Someone please correct me if I’m wrong.
2. An escrow account is set up.
3. The contractors will give the HERS rater estimates on the work designed in the energy package.
The total EEM amount is a percentage of the appraised value determined by a few different factors. It can range from $4,000 to close to $20,000.
4. Yes, all HERS raters are “qualified” to provide documentation. But…most have no experience with EEMs and don’t really know what to do or what documentation to provide.
I agree with the comments
I agree with the comments about lack of knowledge from lenders, having two investors, and underwriting challenges. But we close at least a min. of one true EEM a month and have ramped up including WEATHERIZATION (which allows up to $2k of weatherization in the mortgage without a hers report) to show why energy improvements to a home are important. I am confident that in the next few years this form of financing will be more streamline and the conversation will turn to how do we become a more trusted source from our competition. Best to keep up the kudos on this subject and become the expert now.
The term EEM is commonly used
The term EEM is commonly used to refer to all types of energy mortgages including Energy Improvement Mortgages (EIMs), which are used to purchase existing homes that will have energy efficiency improvements made to them.