Whether buying or refinancing, there are options that allow borrowers to make energy efficient upgrades with their homes. Whether it’s for a new HVAC system or something as simple as replacing inefficient windows with thermal ones, there are ways to leverage today’s mortgage rates and finance the costs of these improvements without having to dip into the checking or savings account.
Additionally, when financing such improvements, the interest on the home improvement loans might be eligible for a tax deduction as well, adding to the benefits of energy efficient improvements.
HELOC. A home equity line of credit, or HELOC, is a revolving line of credit with the home listed as the collateral. A HELOC comes in the form of a second, subordinate mortgage with a predetermined line of credit. Homeowners can tap into this account at any time for any reason and can pay back the loan with minimum monthly payments or pay off the balance altogether only to be used again in the future.
With a HELOC, homeowners can finance any energy improvement from added insulation, energy efficient doors and windows and even a brand new HVAC system. As the balance is paid down, homeowners can tap back into the HELOC whenever needed for any purpose.
Home Improvement Loan. A home improvement loan also comes in the form of a second mortgage but is issued in one lump sum. When applying for a home improvement loan, the lender will need a quote from a contractor that will list the costs for both materials and labor and issue the loan for that amount. Home improvement loans can also take into consideration any “change orders” that might occur while the improvements are being made.
Equity Loan. The third option is also a second mortgage but is based upon the equity in the property and does not have to be designated for any purpose, such as with a home improvement loan. It’s similar to a HELOC because the funds can be used for anything but like the home improvement loan, it’s issued in a lump sum. The lender will evaluate the current value of the home to determine available equity. Equity loans require less documentation than standard home loans and can close quickly. Funds from an equity loan can be used for energy efficient improvements, remodel, pay off higher interest debt or most any purpose.
Cash Out Refinance. A cash-out refinance is also an option and one that provides a very competitive interest rate. Second liens will typically carry higher interest rates than a first lien mortgage, so the payments will be lower compared to other programs. But taking cash out should be a secondary factor when thinking about refinancing. A homeowner might think of refinancing when rates fall, or they wish to change the term of their mortgage, saving on long-term interest.
Another good reason to refinance might be to pay off a first and a second mortgage, lowering the overall monthly payments. Perhaps the homeowner has an adjustable rate mortgage and wants to switch to the stability of a fixed rate mortgage. If homeowners determine that a refinance makes sense, they can also pull out additional cash to be used to make home improvements. And while energy efficient upgrades can be paid for with the proceeds of a cash-out refinance, these funds can be used for any purpose.
Energy Efficient Mortgage. One of the mortgage programs today also allows homebuyers and homeowners to finance energy efficient upgrades. This program, underwritten to guidelines set forth by mortgage giant Fannie Mae, allows borrowers to finance energy efficient upgrades during the course of obtaining a home loan. The program, deemed “HomeStyle” allows homeowners to increase energy efficiency to reduce utility costs for both energy and water efficiency improvements.
When purchasing in an established neighborhood, buyers can finance energy-efficient improvements up to 15% of the “as completed” value of the property. The cost of improvements is financed into the new loan at very competitive interest rates. Such allowable improvements include sealing windows, weather-stripping doors, insulation, sealing ducts and smart thermostats among others.
When making home improvements with energy efficiency in mind, such improvements add to the overall value of the home, so not only do energy efficient upgrades lower your overall utility bills, your property value will increase as well. If you’re deciding to make some major home improvements but don’t know where to start, you can also pay for an energy audit which can assess which utility upgrades provide the greatest return.