23 Sep Beyond the Future 2.2 – A New Perspective on Green Mortgages, Payments, & Incentivized Financing

Sponsored Post – from Teresa Lopez of Green Energy Money

To better understand how a green, high-performance loan should work, we should first review how conventional mortgages and interest is calculated. It’s important to note that all green projects, whether a new construction project or retrofitting an existing home, are related to some type of custom construction financing which can vary, depending on the level of performance measures incorporated in the building.

Typically, the amount of interest paid associated with mortgages costs at least two-thirds more than the borrowed loan amount over the loan life if payments are made on a normal amortization (30-20-15 year loan term) schedule.

Most consumers don’t pay special attention to total interest costs and can’t think that far ahead, often skimming over important documents like the Truth-in-Lending (TIL) disclosure they receive at application and closing.

Most homeowners and real estate professionals may not realize that small incremental increases in interest rates don’t play as much of a role in the life of the loan overall balance, as in how you make your mortgage payments.

The example below reflects three scenarios- 1) a conventional building and loan paid at a constant 30-year term 2) a conventional building and bi-weekly loan paid over 26 weeks; 3) a high-performance building using incentives or energy savings and a bi-weekly payment schedule over 26 weeks; all at the same interest rate.

Accelerated payments can reduce the loan balance dramatically and shorten the loan term; these savings can pay for green upgrades and absorb the capital outlay or costs.   (A quarter percent in interest (.25%) is approximately $44 more in monthly payment @ $300,000 loan amount.)

The purpose of this illustration is to show 1) how interest works; and 2) how using energy savings or lender and other potential incentives or credits can pay down debt more quickly and help pay or offset costs for high-performance building upgrades.

The GEM^©, FREE accelerated mortgage calculator  calculates  and compares both a conventional loan amortization with a bi-weekly mortgage and allows energy savings to be added to the calculation to improve loan paybacks and find out more about saving additional interest.  These tools were developed to educate consumers and real estate professionals to a hidden truth around mortgage interest payments that are often overlooked.  Find out how much your mortgage can pay off.

What Features Should a True Green Mortgage Provide?

A green mortgage should help to save resources, reduce energy consumption and debt – offsetting costs of upfront energy efficiency building and utility infrastructure cost; while greatly reducing the investment and climate risk for both the mortgagee and the investor or mortgagor.

Green loans should:

·       Recognize Green Premium Value through energy savings and operating expenses; quantify and certify building performance;

·       Accelerate loan balance pay-offs -saving interest that offsets the cost outlay for green or high-performance upgrades and pays off debt 5-10 years earlier;

·       Offer bundled incentives tied to the loan, i.e., lower private mortgage and homeowners insurance, property taxes and utility rebates based on performance

Finding incentivized financing in today’s market is a challenge; most lenders don’t treat these unique lending opportunities any differently than conventional loans. In fact, many lenders are reluctant to finance a high-performance project or net-zero energy home, much less offer any incentives to reward owners.  Fannie Mae offers a $250 fee on every energy efficient home loan with proper documentation; most lenders are not aware of this credit or do not pass it through to the borrower as a closing credit.

A true green mortgage that offers economic benefits needs to be implemented in financial markets. In addition to the Solar Federal Tax Credit of 30% (due to expire the end of 2016)  the government should help offset the building envelope costs for high-performance measures.  Lenders should, due to the increased property performance, offer incentives to offset closing costs or interest rate reductions.

The government should find a way to offset the lenders tax liability or reserve requirements for lending on high-performance, near-to-net-zero homes.  Other stakeholders, including PMI and homeowner’s insurance companies ought to offer lower rates due to durability and lower operating expenses.  If we want to maintain the government climate initiative goals, everyone needs to ante up and spread the reward; especially to homeowners taking the most risk and paying the majority of the bill!

Many builders and owners share experiences of being penalized in some form for building net-zero or high-performance homes. Countless homeowners over the past several decades were either forced to compromise operational and energy integrity or pay out of pocket to offset costs to meet lending requirements.  This is an interesting dichotomy since our federal and state governments are driving mandates in building codes and energy reduction programs to increase energy performance in homes.

When considering a new purchase or building for a high-performance home, especially with today’s technology advancement and low interest rates, you can easily achieve savings if you incorporate good, deep energy upgrades to your property.  It’s never been more affordable than today; get your GEM Free energy report for retrofits.

Importance of Calculating a Piece of PIE™

Most consumers and real estate professionals don’t consider the principal and interest and the energy savings when comparing payments for a high-performance home verses a conventional home.  A new way to analyze high-performance building financing is to calculate the P&I + Energy costs – savings = PIE™.  Applying energy savings and/or lender incentives can further accelerate your mortgage balance 5-10 years, and save thousands of dollars in interest (as shown earlier).

The PIE™ example above demonstrates the importance of education and proper evaluation of high-performance building finance.  It’s important to note that energy payments made today don’t reflect inflation rates and future utility bill increases, which would mean more savings.  For instance, the $145 monthly energy savings used in this comparison could be worth over $54 thousand dollars in future value over 20 years, at a constant rate of 4.25%; about the average cost of a high-performance upgrade.

Many case studies  reflect near-net-zero, high-performance homes produce as much, if not more, energy than they consume, meaning they don’t have energy consumption or utility operating expenses.  However, many municipalities require the owner to connect the home to the grid, even if they aren’t paying net-energy fees, which requires them to pay taxes and hook-up fees, estimated at a few hundred dollars a year (as reflected in the $25 monthly bill in the above chart).

Another important factor is mortgages have traditionally included conventional upgrades, i.e., kitchen (average cost @ $50k according to the National Association of Contractors ) and bathroom remodels, building additions, swimming pools, etc. These measures don’t typically save money on energy bills; in fact they can increase the bills, especially when adding pools or additional square footage, etc.

Next, let’s review Wikipedia’s definition of an energy efficient mortgage:

An energy efficient mortgage (EEM) (or “green mortgage“) is a loan product that allows borrowers to reduce their utility bill costs by allowing them to finance the cost of incorporating energy-efficient features into a new housing purchase or the refinancing of existing housing.

Antiquated EEM guidelines have, from time to time (FHA still incorporates expanded ratios, Fannie and Freddie do not), allowed expanded qualifying debt –to-income ratios of approximately a two-three percent increase in debt.  This isn’t a great incentive for most high-performance building owners, as it accounts for approximately $5k-$10k loan increase in energy upgrades, dramatically lower than highly efficient upgrade costs.

Energy efficient mortgages have generally never offered incentives in the form of lower interest rates, Private Mortgage Insurance (PMI), or other tangible financial incentives other than the expanded debt ratios.  In fact, most lenders should associate these reduced operating expenses in their lending ratios, but this is not common practice for the most part.

Historically lenders and appraisers haven’t had comparable property data or standard guidance regarding property energy efficiency economics. Properties today are achieving greater performance and the cost barriers have improved dramatically.  Green measures, especially renewable solar, geothermal and rainwater harvesting are still considered risky, unmarketable upgrades, in many regions, and need to be quantified and analyzed for risk.

The High-Performance Pilot Initiative is being implemented now. We need your support to help drive lenders and investors to implement responsible, incentivized green loans.  Please join the HI-PP Initiative petition today. By proving to policy makers and financial leaders that a pent-up-demand exists and consumer markets require incentivized financing, we can develop innovative financial products.

By bundling economic solutions and improving the financial bottom line, homeowners and builders can readily adopt high-performance building. In turn, the impact of reducing our individual and national debt as well as our global carbon footprint can support dramatic economic growth! Together we can create a healthy economy and planet.  Your support means the WORLD for future generations.