• Gary Sandler
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    Published August 22, 2016

    I read in the June 9, 2016 edition of this newspaper that the recent rate boost granted to El Paso Electric would result in an 89 cent per month average increase for each of their 90,000 residential customers in New Mexico. By my fuzzy math, that’s almost a million dollars a year ($961,200 to be exact). It’s no wonder that energy conservation is a worthwhile endeavor. Unfortunately, the cost to achieve that energy efficiency often stands in the path of benefiting from the savings the improvements can provide.

    When it comes to offsetting the rising cost of energy for their homes, more consumers than ever are also turning to energy efficient mortgages (EEMs). What’s an EEM? In a nutshell, it is a mortgage that benefits homebuyers, sellers and owners who’d like to upgrade the energy efficiency of the homes they own or intend to purchase. Mandated by Congress in 1992, EEM pilot programs were rolled out in five states throughout the U.S. Housing and Urban Development’s (HUD’s) FHA loan program. In 1995, the pilot was expanded as a national program.

    The underlying theory is that energy efficient homes cost homeowners less to operate on a monthly basis than standard homes because they use less energy. Therefore, homebuyers who choose energy efficient homes can afford to spend more on their housing expenses because they will likely spend less on energy costs. Whether utilizing conventional, FHA, or VA financing, EEMs provide mortgage insurance or a mortgage guarantee for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The borrower does not have to qualify for the additional money and does not make a down payment on it.

    In fact, all buyers who qualify for a home loan qualify for the EEM. The EEM is intended to give the buyer additional benefits on top of their usual mortgage deal. The lender will use the energy efficiency of the house, as determined by a Home Energy Rating System (HERS) rating, to determine the extent of those benefits. The U.S. Dept. of Energy’s (DOE’s) HERS report is similar to a miles per gallon rating on a car. HERS reports are evaluations of individual homes’ energy-efficiency. The report is prepared by a trained energy rater who considers factors such as insulation, appliance efficiencies, window types, local climate and utility rates to calculate energy costs.

    Home Energy Ratings contain a numerical score from 1 to 100, a one to five star-plus rating, and the estimated energy costs. Higher scores indicate greater efficiency. Cost-effective upgrades are those that will save more money through energy savings than they cost to install. A HERS rating usually costs between $100 and $300.

    EEMs come in three basic flavors, plus a few variations. The FHA Energy Efficient Mortgage covers upgrades for new and existing homes and is available in all 50 states. The key feature of this program is that $4,000, or 5 percent of the property’s value (up to $8,000), may be used to finance energy improvements. FHA also offers a 203k loan that enables a homebuyer to obtain a single loan to finance both property acquisition and complete major improvements after the closing.

    Next on the flavor list is the VA Energy Efficient Mortgage. This product is available to qualified military personnel, reservists and veterans in all 50 states for energy improvements when purchasing an existing home. Key features include $3,000 of upgrades, which may be financed based solely on documented costs. Up to $6,000 may be financed if upgrades are deemed cost effective.

    The third option is a combination of benefits from Fannie Mae and Freddie Mac. Fannie Mae’s secondary market guidelines permit approved lenders to increase ratios two percent on the debt-to-income requirements for EEMs.This expanded qualifying ratio helps purchasers who are “maxed out” on their income ratios. Freddie Mac allows a lender to use the projected utility savings as a “compensating factor”, allowing more of the borrower’s income to be used toward qualifying.

    EEMs can be done on most homes. Availability is not limited by location, home price or utility company. EEMs can be done on government (FHA and VA), conventional, portfolio and jumbo loans.  All you have to do is find a lender that can help you choose which loan type is best for you. EEMs can also be used to purchase or build a new home. If a new home carries the Energy Star symbol, it already meets the requirements for an EEM. New homes without the symbol may qualify, but are subject to first obtaining a HERS report. Energy Star is a government-backed program helping businesses and individuals protect the environment through superior energy efficiency.

    If the above reasons aren’t enough to excite you, there’s one more benefit to consider. An EEM may also provide you with a larger tax deduction because the interest on mortgage payments is tax deductible. This can save you more money than paying for energy upgrades with a credit card, bank loan or cash, none of which are usually tax deductible.

    For more information on EEMs, visit www.pueblo.gsa.govwww.energystar.gov or www.hud.gov.

    See you at closing!

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      Gary Sandler