Money Talk

Financing Home Energy Efficient Upgrades: How To Guide

As sustainable home building becomes ever more mainstream, thousands of homeowners consider energy-efficient and sustainable homes to be a better investment of their money. Sustainable homes are more durable and resilient. They can save you money in the long run by reducing the residents' amount of water and energy. However, these new homes and retrofits can cost you more money upfront, depending on how you place your priorities. There has been a strong push to lower the cost of some of the more expensive features found in more energy-efficient homes. Despite these efforts, thousands of homeowners cannot secure financing for the expenses that sustainable home building and renovations bring. Fortunately, there are several strategies to find financing alternatives for either new home construction or retrofits to your existing home.

By Tobias Roberts, Rise Writer

9 min read

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LEED Home Winsome Construction — LEED Platinum Home. Photo Credit: Winsome Construction

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.

How Do You Present Sustainable Upgrades To Banks?

Mortgage lenders tend not to be the most flexible institutions in the financial world. However, homeowners can use strategies to demonstrate to the bank the financial sturdiness of your plans to build or retrofit a sustainable home.

Firstly, make an effort to show the bank the potential savings associated with your building plan. You might even consider hiring a certified energy auditor or advisor to document the expected energy savings associated with the blueprint for your new home construction or sustainable retrofit. Your energy advisor will be able to identify certain rebates and incentives that are available to you. These rebates and incentives will further increase your expected monthly savings.

Secondly, consider utilizing a simple mortgage calculator to experiment with increased mortgage costs. You can then compare how these costs correspond to your expected savings through energy-efficient upgrades to your building plan. You may be able to convince your bank to offer a lower interest rate if you can demonstrate that the savings offset the higher monthly payments.

Show your bank how sustainable upgrades to your home will increase your home's value and help it maintain its premium price into the future. For example, a Berkeley Lab study demonstrated how solar panels add significant long-term value to a home.

What Are Alternative Financing Options for Sustainable Homes?

Suppose your local bank or mortgage lender is not prepared to finance the upgrades. You do not necessarily have to throw away your dreams of living in a beautiful and energy-efficient home. Below are several alternative financing options designed for homeowners looking for sustainable housing options.

Green Energy Money (GEM)

Green Energy Money (GEM) is an alternative financing company specially designed for energy efficiency and renewable energy, new construction, and retrofit projects. This company works with mortgage lenders, builders, utility companies, and others involved in designing, constructing, and financing energy-efficient homes. They have standardized a green appraisal method that has made visible a "recognized green premium" for energy-efficient homes. According to their website, "these methods have been accepted and approved by the national mortgage and appraisal industry organizations and meet all regulatory compliance guidelines." GEM offers several free online calculators, such as an accelerated mortgage repayment calculator, incremental property value calculator, and a loan to value calculator. These calculators help you evaluate the costs versus potential paybacks of your sustainable construction.

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.

Energy Saving Products for the Home

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Solar Hot Water and PV — Solar Thermal (Hot Water Heating) and PV

Making our homes more efficient - and eventually getting to net-zero, is vital in our global fight against climate change. Experts in North America are looking to Europe and other parts of the world where this process is already well underway. Hopefully, many more financing options will be available soon, not just for those who are forward-thinking but for everyone. Soon, sustainable homes will be the norm!