As the name implies, a “Green Mortgage” is an environmentally friendly type of home loan.
They’re also known as Energy Efficient Mortgages (EEMs), and their purpose is to make your home more energy-efficient while saving you money.
Green mortgage loans can be added to the mortgage you use to purchase a home or rolled into your current mortgage through an energy-efficient refinance that lets you make improvements to the home you have now.
Proceeds can be used for double-paned windows, tankless water heaters, a high-efficiency furnace or air conditioning system (HVAC), new insulation, and other similar upgrades. The goal is to create a more comfortable, environmentally friendly living space with significantly lower heating and cooling costs.
Unlike a home equity loan or home equity line of credit (HELOC), EEMs aren’t a type of second mortgage. Though structured as a separate loan, they are ultimately rolled into your primary mortgage — so you only make one monthly payment.
What are Energy Efficient Mortgages?
Although “Green Mortgage” is the common shorthand, the official term is Energy Efficient Mortgage (EEM). The primary purpose of EEM programs is to help homes use less energy and produce long-term savings for homeowners.
An EEM is not a second mortgage. It is rolled into your primary mortgage when you buy a home or refinance. You make one monthly mortgage payment, and there’s no additional lien on your property.
If you want to purchase or build a home and add energy-efficient features, you’ll typically get approved for a regular first mortgage and apply for an EEM that is rolled into that mortgage to specifically fund the energy upgrades.
If you’re refinancing and want to add energy-efficient renovations, you would get an EEM and roll it into the new loan.
When you purchase a home with energy-efficient features, lenders recognize that your utility costs will be lower — and may allow you to qualify for a larger overall mortgage amount as a result.
In most cases, if you already qualify for your main mortgage, you’ll also qualify for an EEM — and no additional down payment is required on the EEM portion.
EEM programs are backed by the same entities that support the majority of residential mortgages in the U.S.: the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and Fannie Mae and Freddie Mac.
EEMs are available through the same lenders that offer regular mortgages — banks, mortgage companies, savings institutions, and credit unions. That said, EEMs do require an additional underwriting process before approval and follow strict loan limits. Depending on the program, they may also affect down payment requirements and include a minimum credit score.
Potential Green Mortgage Savings
Consider the following energy savings potential:
- Heating and cooling accounts for 50–70% of the total energy used in the average American home.
- 60% of existing U.S. homes are not properly insulated.
- Updating your home’s insulation can save up to 20% on heating and cooling costs, or up to 10% of your total annual energy bill.
- According to the Department of Energy, energy loss from outdated windows accounts for nearly 25% of the average American home’s annual heating and cooling costs.
- Even basic double-paned windows can reduce energy use by up to 24% in cold climates during winter and up to 18% in hot climates during summer.
- About 20% of conditioned air is lost in homes with central HVAC due to faulty or outdated ductwork.
- An Energy Star-rated dishwasher uses less energy and can save as much as 1,200 gallons of water per year.
- Programmable thermostats can save about 2% on heating bills and more than 3% on cooling bills — translating to up to $180 a year in savings.
Are There Different Kinds of EEMs?
Yes — there are several EEM programs, each tied to a different loan type. Talk to your lender about which makes the most sense for your situation.
Conventional Energy Efficient Mortgage
Offered by lenders who sell loans to Fannie Mae and Freddie Mac, the conventional EEM is the most powerful of the bunch — it allows you to borrow up to 15% of the home’s appraised value for improvements. A minimum credit score of 620 and a 3% down payment are required to qualify. Keep in mind that individual lenders, including Refi.com, may apply their own minimum credit score requirements.
FHA Energy Efficient Mortgage
The FHA EEM doesn’t allow you to borrow as much as the conventional version, but it lets you take advantage of FHA financing benefits. You can borrow up to 5% of whichever of the following is least:
- Your home’s appraised value
- 115% of the median area price of a single-family home
- 150% of the conforming Freddie Mac limit for that area
FHA EEMs are available as 15- or 30-year fixed-rate mortgages or Adjustable Rate Mortgages (ARMs) through FHA-approved lenders. The FHA sets a minimum credit score of 580 with a 3.5% down payment, or 500 with a minimum 10% down payment. However, most lenders — including Refi.com — require a minimum of 620 due to lender overlays. Refi.com’s minimum applies regardless of down payment size.
VA Energy Efficient Mortgage
The VA EEM is available to qualified Veterans and active-duty military personnel, and can only be used when purchasing or refinancing a home.
It allows you to borrow up to an additional $6,000 for energy-efficient upgrades if the projected energy savings exceed the resulting increase in mortgage payments, or $3,000 based solely on the documented cost of improvements. While the VA does not set an official minimum credit score, most lenders require at least 620 to qualify for a VA loan.
The GreenCHOICE Mortgage
Freddie Mac’s GreenCHOICE Mortgage covers energy-efficient improvements — such as solar water heaters and low-flow water fixtures — for new or existing homes. You can borrow up to 15% of the appraised property value after improvements are complete. The GreenCHOICE program requires a minimum 660 credit score with a 3% down payment. Individual lenders may also apply their own overlays on top of this program minimum.
Except for VA EEMs — which have a fixed dollar cap — the amount you can borrow for energy improvements is generally tied to a percentage of your home’s value or local home values, not a hard dollar limit.
A lender may offer one, some, or all of these EEM types. It’s worth shopping around to compare terms and conditions.
Who is Eligible?
If you qualify for a regular mortgage, you’ll typically qualify for an EEM as well.
For the EEM to be eligible for inclusion in your mortgage, the energy-efficient improvements must be cost-effective — meaning the total cost of the upgrades must be less than the full value of the energy saved over the useful life of the improvement.
For example, if a new double-paned window costs $300, it needs to save more than $300 in energy costs over its lifespan.
To get an EEM, you’ll need to have your home evaluated through the Home Energy Rating System (HERS) — an official assessment of your home’s energy efficiency. You’ll find a trained Energy Rater through your lender. The rater will inspect your home and factor in insulation, windows, heating and cooling systems, and local climate to produce an overall rating.
A HERS report includes:
- An overall rating for the home as it currently stands
- Recommendations for cost-effective energy upgrades
- Cost estimates covering the price, projected savings, and expected lifespan of each upgrade
- An estimate of the home’s rating after improvements
- Before and after estimates of annual energy costs
A HERS rating typically costs $300 to $800. If it isn’t covered by the buyer, seller, lender, or real estate agent, it can be financed as part of the loan.
Your HERS rating will help determine how much you qualify for and which upgrades to prioritize.
Once your loan closes, the lender places the EEM funds in an escrow account. You’ll typically have 90 to 180 days to hire professionals and complete the improvements. Funds are released after an inspection confirms the work has been done and the projected energy savings are achievable.
EEMs for Small Businesses
Energy-efficient upgrades and retrofits can meaningfully reduce operating costs for small businesses. While there are currently no commercial versions of EEM programs, several alternatives provide similar benefits:
- Small Business Administration (SBA) loans, including the 7(a) loan and the SBA 504 loan
- State energy efficiency financing programs
- Commercial PACE loans
These programs allow small and medium businesses to:
- Retrofit facilities and upgrade insulation or HVAC systems
- Purchase energy-efficient equipment
- Utilize energy-efficient construction methods
- Install energy-efficient doors, windows, skylights, lighting, and power systems
- Invest in renewable energy sources such as solar, wind, and geothermal
- Replace transportation fleets with hybrid or high-efficiency vehicles
Small Business Administration (SBA) Loans
The SBA doesn’t make loans directly but guarantees them through approved lenders. Applicants must meet both the SBA’s and the lender’s requirements to get approved.
504 Loan Program
This program targets small businesses that need financing for fixed assets like real estate or equipment. It can also fund projects such as purchasing land, constructing new facilities, or modernizing existing ones.
A specialized version called the Green 504 increases the maximum loan amount available to businesses that implement energy-saving technologies resulting in at least a 10% reduction in energy consumption. Renewable energy projects such as solar and wind installations are also covered.
7(a) Loan Program
The SBA’s primary lending program helps startups and small businesses access financing when they may not qualify through conventional lenders. While not explicitly earmarked for energy-efficient projects, it can be used for green initiatives. These loans are available for up to $2 million.
State Energy Efficiency Financing Programs
Most states offer low-interest loans and other subsidies to help small businesses become more energy efficient. Visit the National Association of State Energy Officials website to find programs available in your area.
Ready to Add Energy Efficiency to Your Refinance?
If you’re thinking about refinancing and want to roll energy-efficient improvements into your new loan, Refi.com can help. Start your application at Refi.com and our team will walk you through your options.
