Green mortgages can finance an energy-efficient home and save money

The residential real estate market has been volatile due to rising interest rates, but the peak spring season — if challenging for buyers and sellers — is here. For many potential homebuyers, a green mortgage could be a good idea, especially as incentives for energy-efficiency upgrades increase and costs of new climate technology are coming down.

A green mortgage — also known as an energy-efficient mortgage — is different than a conventional mortgage in that it allows borrowers to finance certain green improvements at the same rate and terms as their home purchase. For many homebuyers this could mean making environmentally-friendly upgrades sooner than they might otherwise be able to afford, while also reducing their monthly energy costs.

Here is what you need to know about green mortgages and financing a home purchase.

How energy upgrades are rolled into a housing loan

If the home you’re considering needs various energy-efficient upgrades, as many houses do, it pays to see what a green mortgage can offer. In the past, buyers may have walked away from a home purchase because the windows were in rough shape or because the water heater was old, said Kevin Kane, chief economist with Green Homeowners United, a residential energy efficiency construction firm in West Allis, Wisconsin.

With an energy-efficient mortgage, homebuyers can finance these types of improvements on better terms.

The U.S. Department of Housing and Urban Development, one of the entities that offers energy-efficient loans, cites the example of a couple who bought a California home for $150,000. They got an FHA loan for 95% of the property’s value. Based on estimates from a required home energy assessment, the lender set aside an extra $2,300 for the improvements, bringing the total loan amount to $144,800, from $142,500. The couple’s monthly mortgage payments rose by $17, but they are saving $45 a month due to lower utility bills.

To be sure, green mortgages won’t be appropriate for everyone. This includes consumers who are buying a new construction or a renovated house that’s Energy Star-certified.

The Inflation Reduction Act and home improvements

The Inflation Reduction Act — an expansive climate-protection effort by the federal government — makes green improvements even more advantageous for would-be homebuyers. 

Kane offers the example of a home that needs a new air conditioning unit. Instead of replacing it outright, a prospective buyer might instead consider installing a heat pump and rolling the cost into a mortgage.

The homeowner could then be eligible for a tax credit of up to $2,000 and a rebate, depending on income, that amounts to 50% to 100% of the unit’s cost up to $8,000.

“You can do it now and not shell out the cash upfront because the bank rolled it into your mortgage, and you can get the incentives which…