This guide covers what is a green mortgage and how it works. Are you looking for a way to make your home more energy-efficient and eco-friendly? Do you want to lower your utility bills and reduce your carbon footprint? If so, you may be interested in getting a green mortgage.

Gustan Cho Associates are mortgage brokers and correspondent lenders licensed in 48 states, including Washington, DC, Puerto Rico, and the United States Virgin Islands and a promoter of Green Mortgage Loans.

Many states and organizations are investing in developing and deploying green energy technologies to reduce their reliance on fossil fuels and decrease the environmental impact of energy production. This blog post will explain a green mortgage, its benefits and drawbacks, and how to get one in the United States.

What Is a Green Mortgage?

A green mortgage is a loan designed to encourage and support energy efficiency in residential properties. Different types of green mortgages are available in the US, depending on the lender and the program. It also rewards homebuyers or homeowners for having or making their properties more energy-efficient.

Lenders offer green mortgage loans for homebuyers or homeowners who buys or owns a home meeting specific environmental standards such as solar systems, windmills, and electric HVAC systems.

A green mortgage can offer cashback, lower interest rates, or higher debt-to-income ratios depending on the property’s energy rating or the cost of the energy-efficient upgrades. Lastly, it can help you save money on your monthly payments and over the life of the loan. It can also help you increase the value and comfort of your home and contribute to the fight against climate change.

How Do You Define Green in a Green Mortgage

The green in a green mortgage is green energy. Green energy, also known as renewable energy, refers to energy sources that are environmentally friendly and have a low impact on the planet compared to traditional fossil fuels (such as coal, oil, and natural gas) that contribute to air pollution and climate change.

Green energy sources are characterized by their ability to be naturally replenished and not depleted over time.

These energy sources do not produce significant greenhouse gas emissions or other harmful pollutants during operation. Some common examples of green energy sources include solar Energy: Solar panels capture sunlight and convert it into electricity or heat. This technology utilizes photovoltaic cells to generate electricity directly from sunlight.

Types of Green Energy

Besides solar panels, other types of green energy include Wind Energy. Wind turbines capture the kinetic energy of moving air to generate electricity. Wind power is harnessed using large wind farms in windy areas. Another type of green energy is hydroelectric energy: Hydroelectric power is generated by utilizing the energy of flowing water, such as rivers or dams, to turn turbines and produce electricity. Geothermal Energy is another example of green energy. Geothermal power taps into heat from the Earth’s interior to produce electricity or provide heating and cooling.

Biomass Energy

Biomass energy is derived from organic materials like wood, agricultural residues, and other plant matter. It can be used for heating, electricity generation, or even converted into biofuels.

Tidal Energy

Tidal power harnesses the moon’s and the sun’s gravitational pull on Earth’s oceans to generate electricity through water movement. Efforts to transition to green energy are a key component of global strategies to combat climate change and achieve a more sustainable energy future.

Who Offers Green Mortgage Loans

Government agencies include the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). These loans are called Energy Efficient Mortgages (EEMs), and they allow borrowers to finance energy improvements along with their purchase or refinance of an existing home. The EEMs can also increase the borrowing limit for borrowers buying or building energy-efficient homes.

Fannie Mae and Freddie Mac Green Mortgage Loans

Conventional lenders, such as banks, credit unions, and online lenders. These loans are usually based on the Home Energy Rating System (HERS) index, which measures a home’s energy performance on a scale from 0 to 150. The lower the score, the more efficient the home.

Some lenders offer discounts on interest rates or fees for borrowers who buy or own a home with a low HERS score. Some lenders also offer cashback or rebates for borrowers who make energy improvements to their homes.

Specialized programs include Fannie Mae’s HomeStyle Energy Mortgage and Freddie Mac’s GreenCHOICE Mortgage. These loans are similar to EEMs but have different eligibility criteria and benefits. For example, Fannie Mae’s HomeStyle Energy Mortgage allows borrowers to finance up to 15% of the as-completed appraised value of the home for energy improvements. In contrast, Freddie Mac’s GreenCHOICE Mortgage allows borrowers to finance up to $6,500 for energy improvements.

How Do Green Mortgage Loans Work

.The process of getting a green mortgage varies depending on the type of loan and the lender. However, there are some common steps that most borrowers have to follow. The first step in obtaining a green mortgage is to choose a lender that offers a green mortgage program that suits your needs and goals.

Choose a property that meets the energy efficiency standards of the lender or program. You may need a certified professional’s energy audit or rating to verify the property’s energy performance.

Apply for pre-approval or pre-qualification with the lender and provide your financial information and documents.  Submit your loan application and supporting documents to the lender for approval. The lender will evaluate your creditworthiness, income, assets, debt, and property value. Close on your loan and start making your monthly payments. After completing your energy improvements, you may receive cashback or rebates from your lender or program.

What Are the Benefits of a Green Mortgage?

A green mortgage can offer several benefits for borrowers, such as saving money on interest rates, fees, or monthly payments by getting discounts or incentives from lenders or programs. You are saving money on utility bills by reducing energy consumption and increasing energy efficiency.

Choose the type and amount of energy improvements you want to make to the property. You may need to get estimates from contractors or vendors to determine the cost and savings of the improvements.

You are increasing your home value and comfort by making your home more attractive and functional for potential buyers or renters. You reduce your environmental impact by lowering greenhouse gas emissions and supporting renewable energy sources.

What Are The Negatives of a Green Mortgage

A green mortgage can also have some drawbacks for borrowers, such as paying more upfront costs for energy audits, ratings, improvements, or inspections that lenders or programs may require. There are limited options for lenders, programs, properties, or improvements that meet the criteria for a green mortgage. Having difficulty finding reliable contractors or vendors that can perform quality work at reasonable prices for energy improvements.  Having difficulty measuring or verifying the savings or benefits of energy improvements over time.

How to Choose the Best Green Mortgage for You

If you have decided to get a green mortgage, you may wonder how to choose the best option. There are many factors to consider, such as the type of property you want to buy or own.

Different types of properties may have different energy efficiency ratings and potential for improvements. For example, a newly constructed home may already have high energy performance, while an older home may need more upgrades.

The type of energy improvements you want to make or have made. Different types of improvements may have different costs and savings. For example, installing solar panels may be more expensive and rewarding than adding insulation. Different lenders or programs may offer different incentives and benefits for borrowers with a green mortgage. For example, some may offer cashback, rebates, tax credits, or grants for energy improvements.

Why Do Banks and Lenders Support Green Mortgage Loans

Many banks and lenders support green mortgages. The government often rewards banks and lenders offering green mortgage loans. Banks and lenders like the advantages of green energy sources include reducing greenhouse gas emissions.

Banks and mortgage lenders promote green mortgages because it improves air quality, mitigate climate change, and promoting energy security by diversifying energy sources.

Green energy technologies also have some challenges. Challenges of a Green Mortgage are intermittent energy production (solar and wind), initial high costs of installation, and the need for proper infrastructure and storage solutions to manage energy supply fluctuations.

Who Can Qualify For Green Mortgages

A green mortgage is a loan that rewards homebuyers or homeowners for having or making their properties more energy-efficient. A green mortgage can offer cashback, lower interest rates, or higher debt-to-income ratios depending on the property’s energy rating or the cost of the energy-efficient upgrades.

The availability and eligibility of lenders or programs in your area. Lenders or programs may have different criteria and requirements for borrowers and properties.

You should check the availability and eligibility of each option in your state, county, or city—the incentives and benefits offered by lenders or programs. Contact us now, and we’ll help you find and apply for a green mortgage that suits your situation. A mortgage broker or advisor can also help you negotiate the best deal and guide you through the loan process.