'Green' Home Loans 101 - For What It's Worth - Comcast.net Finance

One need not buy a home with composting toilets, solar panels and straw-bale insulation to qualify for a so-called "green" mortgage. Simply purchasing a house and adding energy-efficient doors, windows or insulation can enable you to qualify for this type of loan or refinance an existing mortgage to cover the cost of certain home improvements. But what many articles don't mention – and there have been MANY published recently – are the limitations of these types of loans.

Could a green mortgage be a cost-effective way for you to get back into the housing market? Or might the energy-efficiency benefits for your existing house allow you to save thousands on a home-improvement project you've been considering? Let's find out...

The Basics

Remember the first wave of woodstove/solar energy hysteria during the 1970s oil crisis? That Nixon/Ford/Carter era gave birth to energy-efficient mortgages (EEMs), as these types of loans are officially called. But it's only since 2003-04, when the eco-bandwagon started rolling again, that green mortgages have become more widely used by consumers.

Here's how green mortgages work: When a home buyer has a more energy-efficient home, that home will presumably have lower utility bills, which frees up more of the owner's income to put toward a mortgage payment. So a lender may lend a higher amount to a buyer than the buyer really qualifies for based on stated income. The Daily Green sums up green mortgages here with additional helpful links.

Other variations on these loan programs may offer an interest-rate reduction or lump-sum credit to borrowers. On the downside, some banks' lump-sum credit may be as little as $1,000, and while every little bit helps, we all know that's just a fraction of the cost of a new furnace or better windows.

Many lenders, including the Federal Housing Administration, U.S. Department of Veterans Affairs, Fannie Mae and Freddie Mac, now offer green mortgages.

New York, Pennsylvania and Kansas are among the states that fund their own EEM programs, and certain banks, including Bank of America and Citibank, also offer these types of loans. For a rundown of energy-related programs in your state (and an easy way to see what some of your state and federal tax dollars are being used for), check out the National Association of State Energy Officials’ "State Energy Program and Activity Update – Winter 2009" summary.

The HERS Inspection

The most critical extra step required to qualify for a green mortgage is a Home Energy Rating System (HERS) inspection, which will rate a home's energy efficiency on a scale of 1 to 100. This inspection should be completed before buying an existing home or a newly built house. It is done by a certified home energy rater and typically costs between $100 and $300.

For existing homes, the inspection report should recommend which home improvements will be the most cost effective, how much the changes will cost, and how much a homeowner will save annually by making the changes. In new construction, builders must certify a home's energy-efficient features.

The Limitations

Before you start planning a list of improvements, be aware of how much – or how little – certain EEMs will cover, particularly when looking at the real costs of home improvements.

For example, a buyer who qualifies for an FHA-backed EEM can add up to 5% of the property's value (not to exceed $8,000) or $4,000, whichever is greater, to the mortgage amount. That amount may increase if a home buyer is planning to add some solar-energy features or improved insulation and weatherproofing. Also, the upgrades' total cost must be less than the total dollar value of the energy saved during the upgrades' useful life.

Not to spoil the party, but anyone who has been involved in home-improvement projects knows that $8,000 (or less) is not going buy a lot of double-pane, insulated windows or a new heating/air conditioning system, nor will it cover the cost of solar panels except in the smallest of applications. It's a start, but it will leave a lot of home buyers on their own if a property needs extensive improvements. A complete, plain-language rundown of the FHA EEM program is available here.

The VA's EEM program is similarly limited, allowing active-duty personnel, reservists and veterans to finance up to $3,000 in upgrades or up to $6,000 if the home improvements' total cost is less than the total dollar value of the energy saved during the upgrades' useful life.

The Tax Credits

If you're not buying a home but live in one that could benefit from improvements to doors, windows, roofing, insulation, the HVAC system, the water heater and more, or even if you want to add a residential wind-energy system, you may also qualify for tax credits if you make these improvements in 2009 or 2010. This is great news for procrastinators (myself included) who didn't get around to certain projects in 2008. That's right: 2008 improvements will not benefit from the current tax-credit structure explained in a clear summary at the energystar.gov site.

Again, just like EEMs, the limitations on the tax credit are, well, a bit unimpressive when you look at the real cost of many of these home improvements. For example, on many general improvements, the tax credit is available for 30% of the cost, up to $1,500.

Another scenario for owners of existing homes who need to pay for improvements is to finance them through a home-equity loan or refinance (rates are very low, after all), which will provide an additional loan-interest deduction on tax returns. In this economy, most people will agree that every little bit helps.

Final Word: Home-Price Update

You don't have to be in the market for a home to be interested in home-price trends. Last week the S&P Case-Shiller Index showed prices in 20 metropolitan markets fell 19% for the three-month period ending in January 2009, compared to the same three-month period last year. That's a record, albeit a hard one for sellers to swallow.

Buyers, are you ready to start your engines? Or do you think home prices still have room to fall?

-- Valerie Patterson oversees all online and print marketing efforts at Kurfiss Sotheby's International Realty, a privately-owned real-estate firm based in the Philadelphia area. Prior to joining Kurfiss, she was the producer of The Wall Street Journal's free real-estate site, RealEstateJournal.com.

Message Edited by Val_A_Patterson on 04-10-2009 01:10 PM