Financing Home Energy Efficient Upgrades: How To Guide

The Myth of Expensive Sustainable Homes 

Many banks and major mortgage lenders continue to make loan decisions based on the false assumption that better-built homes are an expensive luxury. FSC-certified tropical lumber could indeed be a costly addition to a new hardwood floor. But, other sustainable building elements make perfect economic sense.

For example, opting for ENERGY Star certified triple-pane windows or even Passive House grade windows would add a few thousand dollars to your home's price tag. Fortunately, these types of windows would help lower the heating requirements of the dwelling. In addition, it may allow you to opt for a smaller furnace and possibly less ductwork in new home construction. These savings would help offset a significant portion of the added cost of the windows.

Unfortunately, many mortgage lenders are not prepared or trained to take into consideration these immediate savings. Banks will often focus only on the initial upfront costs associated with home building or retrofits instead of looking at the larger picture of life-cycle costs. Sustainable homes are usually durably built, meaning that homeowners will most likely spend less on replacements and repairs over the lifetime of the mortgage.

Energy Efficiency Savings to Offset Higher Mortgages

Perhaps most disappointing is that banks and mortgage lenders do not account for the savings with energy-efficient homes. Costs that can substantially offset the higher monthly mortgage payment that comes with a more expensive home. The US Department of Energy estimates that the average homeowner in the United States spends $2,060 on energy bills each year. A high-performance energy-efficient home could reduce energy bills by up to 90 percent, for a yearly savings of around $1,850. To achieve such economies, a homeowner would have to include numerous sustainable building elements. These elements could include things like:

• A residential PV system
• Solar hot water collectors
• A super tight house envelope
• Insulation upgrades
• Passive house construction, and 
• Many other components of energy-efficient design

The Residential Renewable Tax credit will further increase your savings. It allows for a 26 percent tax credit for solar systems on residential and commercial properties until 2022. This will then decrease to a 22% credit for systems installed in 2023. And, other strategies like low-flow water fixtures throughout the home would reduce your monthly water bill. 

Costing Example

Let's assume that these sustainable upgrades will increase the home construction cost by twenty percent. This estimate is relatively high - we usually see just 5 to 8 percent increases with well-planned jobs. 

So, these upgrades could increase your mortgage from, say, $250,000 to $300,000. Take a 30-year mortgage with a 5 percent interest rate and a 15 percent down payment. In this case, the monthly payment would increase by $240 a month, or $2,880 each year. 

This example demonstrates that the monthly cost savings on your utility bills could offset much of the additional home construction cost.

Solar and Energy Loan Fund (SELF) 

The Solar and Energy Loan Fund (SELF) is a Florida-based non-profit organization. It offers low-cost financing options for homeowners looking to reduce their energy bills through more energy-efficient home construction. SELF provides a comprehensive energy assessment of your home. They offer help from financial experts to assist you in discovering the most cost-effective energy investments. These include low-interest and no-money-down loans. SELF provides a list of approved contractors to homeowners. While this program is based out of Florida, similar programs are beginning to pop up around the continent, such as these energy retrofit loans provided for multi-family homes by the City of Toronto. 

Property Assessed Clean Energy (PACE)

PACE Financing is an innovative financial tool to help homeowners make energy efficiency upgrades or renewable energy installations on their homes. These upgrades are wide-ranging and include everything from building-energy efficiency improvements to water efficiency products to installing rooftop solar panels. 

Where PACE financing is publicly available, local or state governments offer a bond to investors to put towards energy retrofits or new home construction. The loans are re-paid through an independent assessment of property tax bills of the benefited homes. Unlike traditional loan instruments, PACE loans are attached to the property and not the individual, making this financing option available to a broader population segment. 

Credit Unions

Consider looking into what opportunities exist with local and national credit unions. Credit unions are non-profit organizations that often offer energy-efficient mortgages (EEMs) at competitive rates. You can read the Rise guide to financing energy efficiency with credit unions to find reputable lenders or steer you toward those in your region.