Energy Efficent Upgrades for your home can improve your property’s value, make your home healthier and more comfortable, and lower your utility bills. They can also cost thousands of dollars. So what’s the best way to finance energy efficient upgrades?
If you are thinking of buying a home, there are programs to finance energy efficient upgrades into your first mortgage. If you are a current homeowner, there are many ways to finance energy efficient upgrades, either as a separate loan, or tied into a refinance.
Here are 6 ways to finance energy efficient upgrades:
- Solar Leases
- PACE financing
- Home Equity Lines of Credit
- Energy Efficient Mortgages
- Renovation Loans
- Credit Union or Bank Loans
- Fannie Mae EnergyLoan® Program.
1. Solar Leases
What is Covered?
Unlike the other programs described in this article, solar leases finance only solar systems. Solar leases are offered by the companies that install the solar panel systems. This is an option to buying the system outright, either with cash or a loan.
How Much Does it Cost?
Solar leases appear to be a great deal at the beginning, because you usually pay $0 down. Unfortunately, they are very expensive in the long run. You can read about Solar Panel Basics, which compares buying vs. leasing solar in detail.
How Do I Apply?
Most solar contractors offer leasing, because it is so profitable for them. Qualification is often quick, and requires little documentation. Contact your favorite solar contractor for more information. You can also read about How to Choose a Solar Contractor.
2. PACE Financing
What is Covered?
PACE Financing is not a loan, but a property tax lien. The debt is directly tied to the property.
PACE Financing covers a wide variety of energy-efficiency and water-efficiency upgrades. Read my article about PACE Financing for more details.
The amount that can be financed through PACE is limited to 15% of the market value of the property up to $700,000, and 10% after that. The repayment period is between 5-20 years, depending on the upgrades. The combined assessment for PACE and property taxes cannot be more than 5% of the market value of the property at the time the improvement is done.
How Much Does it Cost?
Even though they offer 100% financing with no down payment, PACE financing programs charge origination fees and interest. Interest rates vary between 4.75% and 9%. The origination fee can cost up to 7% of the borrowed amount. Here are some examples:
- The HERO program normally charges a 4.99% origination fee, a $95 recording fee, and $35 tax roll fee.
- Ygrene charges a 3% origination fee, plus upfront program fees. The program fees vary from County to County, and usually range from $794-$844.
- CaliforniaFirst fees vary, based on county, and the type and cost of the project. For a $20,000 solar installation in San Diego County, with a 20-year payback term, CaliforniaFirst charges a 6% origination fee, $1280 program fee, $90 recording fee, and $52.99 reserve fund fee. The interest rate for this project is 8.29%.
How Do I Apply?
To get started, you can go to a program website and begin your application. A contractor can also help you with the application. There are three companies in California that offer a majority of the state’s PACE programs. Go to my article about PACE Financing for links to each program.
3. Home Equity Line of Credit (HELOC)
What is Covered?
A Home Equity Line of Credit (HELOC) is a revolving account, that uses your property as collateral. You can use the funds to finance energy efficient upgrades, and for anything else you want. You do not need to justify your purchases. Your lender will give you a checkbook and/or debit card to easily access your credit line.
How Much Does it Cost?
A HELOC has a higher interest rate than a fixed mortgage. The interest rate is usually variable, based on an index, such as the prime rate. Currently, HELOC interest rates are about 5.5%. The closing costs to open a HELOC are usually $500 or less. It is a revolving account, like a credit card, so you can use it again and again whenever you pay down the balance. Another benefit is that the interest is usually tax-deductible.
How Do I Apply?
Contact your lender to open a Home Equity Line of Credit. Credit unions seem to offer some of the best HELOC programs.
4. Energy Efficient Mortgages – Fannie Mae, FHA, VA
What is Covered?
Energy Efficient Mortgages (EEMs) are available for conventional, FHA, and VA home buyers. EEMs allow you to finance energy efficient upgrades directly into your first mortgage.
A Home Energy Rating System (HERS) report is required. (Read more about Home Energy Assessments.) This HERS report will identify qualifying energy improvements for your property. These improvements include HVAC systems, solar, storm doors, dual-pane windows, and insulation.
Conventional EEM
Conventional borrowers can take advantage of a Fannie Mae EEM. Existing home buyers can also refinance into a Fannie Mae EEM. The amount to finance energy efficient upgrades cannot exceed 15% of the property’s value.
FHA EEM
The Cal-EEM program is for FHA home buyers only. You cannot refinance into an FHA EEM.
The total allowable costs of the improvements that may be eligible for financing as part of the loan is either 5% of the property’s value, not to exceed $8,000, or $4,000, whichever is greater. Cal-EEM also offers a grant to help pay for energy efficient improvements. Go to my article about CalHFA programs to read more about the Cal-EEM + GRANT Program.
VA EEM
VA borrowers can add up to $6,000 to their existing VA loan to pay for energy improvements. Go to my article about VA Loan Programs for more details.
How Much Does it Cost?
Energy Efficient Mortgages are very similar to regular mortgages. The interest rates are usually a little higher.
How Do I Apply?
Talk to your lender about applying for an Energy Efficient Mortgage.
5. Renovation Loans
Renovation loans are another way to finance energy efficient upgrades directly into your first mortgage. These loans are for home buyers and existing homeowners. Homeowners can refinance into a cash-out refinance renovation loan, to pay for green upgrades.
There are three types of Renovation Loans: the FHA 203k, Fannie Mae HomeStyle, and Freddie Mac Renovation Loan. For more information, read about Renovation Loans.
What is Covered?
Renovation Loans can finance energy efficient upgrades, and many other improvements. Here are some examples of qualifying upgrades:
- Energy conservation improvements, including solar panels, sealing/insulation, and other green features
- New energy-efficient appliances
- Major landscaping, including waterwise native plants and trees that can help protect your home from wildfires
- Modernizing plumbing/electrical/HVAC systems
- Decks
- Fencing
- Roofs
- Structural alterations/additions, including adding a garage
- Foundation repairs
- Adding a second story
- Interior and exterior painting
- Flooring
- Updating kitchens and bathrooms
- Knocking down walls
- Replacing windows
- Doors
- Exterior siding
- Miscellaneous repairs
- Permits
- Inspection fees
- Architectural/engineering fees
How Much Does it Cost?
Renovation Loans have similar costs to conventional mortgages. There are slightly higher interest rates, and there are some additional fees when you close escrow.
How Do I Apply?
Many lenders are not familiar with Renovation Loans. Because of this, the first step is to find a lender who processes Renovation Loans, or contact me for a referral.
6. Credit Union or Bank Loans
In San Diego County, there are two credit unions that advertise special loans you can use to finance energy efficient upgrades. In addition, credit union green upgrade loans are unsecured, meaning that your property is not used as collateral for the loan.
What is Covered?
Credit union green loans will finance energy efficient upgrades such as solar panels, sealing/insulation, Energy Star appliances, new HVAC systems, and dual-pane windows. Some loan programs will finance water conservation projects, such as drip irrigation systems, firewise landscaping, and rainwater harvesting systems.
How Much Does it Cost?
Point Loma Credit Union offers Green Living Loans, with interest rates between 5.49% – 8.99%. You can borrow up to $50,000 with terms up to 10 years, depending on your qualification.
In addition to Point Loma, Wheelhouse Credit Union offers Solar Loan Financing. Interest rates begin at 4.49%. You can borrow up to $80,000, depending on your qualification.
How Do I Apply?
To begin, contact your local credit union, and ask about loans to finance energy efficient upgrades.
What is Covered?
EnergyLoan will finance energy efficient upgrades, such as sealing, insulation, windows, doors, heating and cooling systems, geothermal systems, solar panels, and whole house energy improvements. Loans range from $1,000 to $25,000, with 100% financing available. You have up to 10 years to pay.
The Bottom Line
Making your home more energy efficient can increase your property’s value. There are many upgrades that will improve the air quality and comfort of your home. By reducing your energy load, you will reduce your use of the energy grid and enjoy lower utility bills. If you go one step further, and go solar, you can lower your utility bills even more.
For example, you may find that installing $25,000 worth of energy upgrades decreases your utility bills by at least $200 per month, and only increases your monthly mortgage payment by $125 per month.
There are many ways to finance energy efficient upgrades. Consider all of your options, and choose what makes the most financial sense to you. Keep in mind that mortgage interest payments are tax-deductible. Any debt using your property as collateral, provides you with that tax deduction.
Of all these options, I usually prefer the Home Equity Line of Credit, if it’s available to you for under 6% interest rate. That way, you can lock in a lower rate for your first mortgage, use it however you want, and still benefit from the tax deduction of all the interest payments.
For More Information
If you want to sell a home with a financed solar system, read my Selling with Solar article.
Finally, go to the Go Green Financing page of Energy Upgrade California for more financing options. They offer a database of financing solutions.
Good luck with your green home improvements, and as always, contact me if you have any questions.
I couldn’t have written this article without the expert advice of Nick Richardson:
Nick Richardson is a mortgage banker with EZ Fundings in San Diego, California, NMLS #966361. He can help you finance or refinance properties located in California. Nick can answer all of your questions about mortgage programs, with no hassle, no obligation. Contact him at 760-402-6962 or e-mail nick@ezfundings.com.
