Financing more energy-efficient buildings is a big topic globally. While this is from David Brown, a real estate broker from Arizona, he raises important points on the AzCentral website that should be of interest to many of you.
3 questions to ask about Energy-Efficient Mortgages
An Energy Efficient Mortgage is good to weigh, but there are considerations.
To get started, she asks them three basic questions.“ As a real estate broker, I try to encourage my clients to look at the total picture when considering buying a house with an energy-efficient mortgage, purchasing green energy products or retrofitting an existing house,” said Liz Recchia, a broker with We Sell Real Estate and the We Sell Real Estate School of Real Estate in Phoenix.
Does the energy system or improvement encumber the house so that resale is jeopardized?
Financing energy-efficient upgrades is generally good if you’re planning to stay a while, but will these improvements help you sell in the short term?
“This is particularly important when considering large improvements such as solar systems or taking advantage of some of the community-rehab programs,” Recchia said.
Perhaps the largest project for most people are solar systems, which will cost about $20,000 without rebates if you are purchasing rather than leasing.
Ask: Is the system being financed or are you paying cash?
If the system is not financed through the mortgage, that is, independently, most company-financed systems have a graduated loan, that is, the payment increases by a set amount over time. And, a buyer purchasing the house may or may not be able to qualify to assume the loan depending on the terms and expense.
Finally, will the loan be assumable if the current buyer needs to sell before the loan is paid off?
In turn, the buyer has to consider that if he or she assumes the loan, how will the affect the debt-to-income ratio.
“It’s possible, then, that assuming the loan will not be possible because the assumption of added debt is more than the buyer can qualify for,” she said.
Existing solar leases make a buy more complex because FHA-based loans, for instance, do not finance leased solar systems, even if the lease is paid off, because leased equipment owned by the solar equipment provider must be returned after the duration of the contract (usually 20 years).
FHA only insures real estate loans that include affixed property only. Leased equipment is personal property by virtue of the contract the homeowner and solar equipment provider sign, Recchia said.
“The reason a homeowner would pay off the lease early is to make the house more marketable/saleable to the buyer,” she said. “Frequently the first stumbling block to a sale is the impact of a transferred lease on the buyer’s DTI. If the DTI is too high, the buyer will no longer qualify for the purchase loan.”
For other upgrades, such as dual-pane windows, improved insulation and even weather-stripping, financing through an EEM or EIM mortgage is just one option.
For homeowners with incomes below 80 percent of median income (about $42,785 in Maricopa County), cities and counties have housing-rehab programs to aid homeowners in making energy-efficient upgrades to their homes.
Major systems such as heating and cooling may also be fundable through these municipal programs, Recchia said.
Some of these programs are grants and don’t require repayment, and some are forgivable or part of deferred-loan programs. Frequently these programs require the homeowner to occupy and own the property for a specified number of years.
“This may become an impediment to resale if the owner needs to sell for some reason before the program terms are met,” Recchia said. “In the case of distressed ownership, a homeowner who short sells or is foreclosed on may still be responsible to pay back the program funds.”
How long does it take to recapture the initial investment and finally show real savings?
Recchia encourages clients to calculate how long it will take to recapture their investments.
“For larger improvements, the recapture of the initial investment may take a decade or more.”
Don’t forget the additional expense of interest on the increased loan amount when calculating this.
“When HUD does their calculation for EMM expense, they neglect to include the calculation for interest on the financed energy-efficiency items; therefore, the calculation is less than the real dollar costs to the consumer,” she said.
When the interest is included on the financed amount at 3 percent interest, it takes about 6.5 years to recapture the total cost.
For homeowners planning to live in the house several more years, this may be a good economic decision. But with the average homeowner selling at seven years, you must think realistically. “That means you would have to live in the house six years and seven months before realizing real savings,” she said.
“For larger improvements, the recapture of the initial investment may take a decade or more,” she said.
What would the improvement bring in real dollars as sold to the most likely buyer?
When sellers plan to sell their house, they add up all the improvements and just tag this on to the asking price. But buyers may not tally the same way.
“Sellers make decisions based on fiscal sense and their own personal values,” she said. “Buyers may not realize the same financial return or have the same personal values.”
Because sellers who use energy-efficient mortgages have financed the improvements and received a loan amount larger than a traditional loan would allow, they have less equity.
“As with any other loan with low or no equity, if the seller needs to sell it may become a short sale,” she said.
For sellers who have government-grant or deferred-loan programs, the occupancy requirement may impede their ability to sell.
“Because the terms of these programs demand owner occupancy, renting out the property is not possible should the homeowner be unable to physically occupy the property,” she said.
A seller who has installed a large improvement, such as a solar system, must ask: “Does the loan or lease prevent me from transferring the property to a buyer because of the financial or loan restrictions?”
Making the sale even more challenging are requirements such as high FICO scores, payment terms and program requirements, Recchia said.