Green Mortgage Guide: Loans and Incentives for Greener Homes

Upgrades to make your home more sustainable can reduce your home carbon footprint, increase your property’s value, and save you money over time. But they can be expensive, and most of us can’t afford the up-front cost. 

‍

Green mortgages, loans, and home insurance incentives help make eco-friendly living more accessible. They’re becoming more common as lenders catch on to ways these initiatives can benefit their bottom line. 

‍

So what is a green loan? And can you use one?

‍

What is a Green Loan and What Projects Qualify?

‍

A green loan is a loan designed specifically for an eco-friendly home-improvement project. Homeowners can take advantage of the green loan market for nearly any project that makes their residence more sustainable. Green loans often offer favorable interest rates, repayment terms, and other perks to incentivize home improvements that are good for the planet. 

‍

There are three main ways to lower the cost barrier to green home improvements:  

1. Green Mortgages
2. Green Loans and Grants
3. Green Insurance Incentives

‍

You can use green loans to finance projects like: insulation, roof cooling, solar panels, efficient cooling or heating, water heating, lighting, EV chargers, efficient appliances, and more. Check with your provider to see exactly which types of projects they will give you a loan for.

‍

Getting a Green Mortgage

‍

The most common green loan example is a green mortgage, also known as Energy Efficient Mortgages (EEMs). EEMs are rolled into your primary mortgage to finance eco-friendly updates or to purchase an energy-efficient home.

EEMs are offered by the by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and banks for energy-efficiency updates on your home.

‍

How do green mortgages work?

‍

• Improving a new home: Cover green improvements you plan to make when you purchase a new home. Energy-efficient mortgage lenders take future energy savings into account, so you may qualify for a larger loan – for improvements that will increase the value of your home – without a bigger down payment.
• Improving your current home: You can also add an energy-improvement mortgage (EIM) to your current home loan to make eco-friendly updates to your property. This may increase your monthly payment off the bat, but it saves you money on utilities in the long run. 
• Purchasing a green home: If you want to buy a home that’s already eco-friendly, a green mortgage can be added to your primary mortgage with no additional down payment, so you can purchase a more valuable property. 

‍

What are the benefits of green mortgages?

‍

Green mortgages are a win-win for borrowers and lenders alike. Energy-efficient homes cost less to power, slashing utility bills and making borrowers less likely to default on their mortgage loans. Since green homes are becoming increasingly attractive to buyers, these improvements also reduce the risk that a home will lose value over the course of the mortgage repayment.

‍

Other benefits of green mortgages include:

‍

• Short and long-term savings: Green mortgages are an affordable way to make energy-efficient improvements that can save you money on utilities and increase the value of your home in the long run. 
• Rolled into mortgage: Green mortgages are bundled with your primary mortgage and don’t require an additional down payment. Depending on the specific program, refinancing for a green mortgage may even reduce your overall interest rate. 
• Access greater funds: Green upgrades are exempt from the mortgage qualification process. For example, if you apply for a $180,000 loan with an additional $15,000 for energy-efficiency improvements, your lender only considers the initial $180,000 when determining your eligibility.
• Incentivize energy efficiency: Energy efficiency is good for you and the lender. And by making these updates more accessible, green mortgages help reduce our collective pull on the planet and facilitate the changes necessary for the transition to net zero.  

‍

What are the downsides of green mortgages?

‍

• Stricter project parameters: Green mortgages often require the borrower to work with a certified installer or buy only equipment that meets lender-determined standards and requirements. 
• Added complexity: Getting a green mortgage can require more work on behalf of the borrower than other loan types. While the benefits are clear for major, high-cost projects, the extra steps can make them less attractive for one-off updates. 
• Limited insight: Green mortgages are still fairly new on the financial market. Institutions must do more research to quantify the benefits for homeowners and lenders alike to reduce borrower anxiety and boost institutional buy-in. 

‍

How can I get a green mortgage?

‍

Whether you’re buying a home or refinancing, these steps will help you find the green mortgage that’s best for you:  

‍

1. Assess your personal situation: Begin by checking your credit score and mortgage eligibility. If you already know the property you’d like to update, identify specific improvements you’d like to make – our guide to home energy efficiency can help you pinpoint where to start!
2. Shop and compare lenders: Most major lenders offer federally-insured green mortgages, including the U.S. Federal Housing Administration and Department of Veterans Affairs. Each program is different, so shop around and ask lenders which types of projects they finance and what incentives they offer.
3. Conduct a home appraisal: Just like a regular mortgage, you’ll need to have the home in question appraised to determine its current value. 
4. Have a home energy audit: Next, a professional auditor must perform a Home Energy Rating System (HERS) report. These audits rate the current energy efficiency of the home, existing cost savings, and the value of potential improvements. The audit cost can often be covered by the final loan.
5. ‍Work with lender on details: Your green energy mortgage provider will take the home’s current value, current and future efficiencies, and/or upgrade costs into consideration and issue you a single loan for the primary mortgage and green improvements.

‍

Getting Green Loans and Grants

‍

Green mortgages are excellent for major energy-efficiency conversions and home purchases. But what if you want to make a one-off improvement to your existing home? Instead of refinancing, a green loan, personal loan, or green grant may better suit your needs.  

‍

True green loans 

‍

Green loans are offered by financial institutions specifically for climate-friendly home improvement projects, like solar panel installation or insulating a drafty attic. While true green loans are still fairly rare, they’re gaining popularity. Shop around to see what opportunities are available to you, and check out Nerd Wallet's great list of green financing options.

‍

Personal loans for green projects

‍

Green loans and mortgages often require borrowers to meet certain standards and requirements. If you plan to do some of the work yourself or want to use a specific product or contractor, a personal loan can provide the same long-term savings and value without the additional restrictions.

‍

Green grants and voucher programs

‍

Depending on where you live, your state or province may offer green grants or vouchers to offset the cost of energy-efficient improvements and upgrades. Check your eligibility with a quick Google search for programs in your region. Contractors are often aware of existing programs, too, so ask around when you’re preparing for your next project. 

‍

Getting Green Home Insurance Incentives

‍

Energy-efficiency incentives aren’t limited to green loans and mortgages. Insurance providers are catching on to the ways resilient, sustainable homes benefit their bottom line. Yours may offer the following: 

‍

Green Insurance Discounts

‍

Some insurers providers offer home insurance discounts for LEED-certified environmentally-friendly homes. If you’ve recently performed major updates, check if you’re eligible for a lower monthly rate, or shop around for a new provider that offers a discount. 

‍

Green Add-Ons and Endorsements

‍

Destructive events like floods and hurricanes can leave your home in need of major repairs. Ask your insurer if they offer add-ons to supplement the cost of energy-efficient upgrades or eco-friendly materials so you can come out for the better if disaster strikes.