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What is an Energy
Efficient Mortgage?
“Energy Efficient Mortgages,” also known as EEMs, make it easier for
borrowers to qualify for loans to purchase homes with specific
energy-efficiency improvements. Lenders can offer conventional EEMs, FHA
EEMs, or VA EEMs.
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VA Energy Efficient Mortgages
The Veteran’s Administration (VA) EEM is
available to qualified military personnel, reservists and veterans
for energy improvements when purchasing an existing home. The VA EEM
caps energy improvements at $3,000–$6,000.
To learn more about EEMs contact Fannie
Mae, Freddie Mac, the FHA or the VA. Additional information about
writing energy-efficient mortgages can be found on the Web sites for
the
U.S. Department of Housing
and Urban Development (HUD) and the
Residential Energy Services Network (RESNET)
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FHA Energy
Efficient Mortgages
FHA EEMs allow lenders to add 100 percent
of the additional cost of cost-effective energy efficiency
improvements to an already approved mortgage loan (as long as the
additional costs do not exceed $4000 or 5 percent of the value of
the home, up to a maximum of $8000, whichever is greater). No
additional down payment is required, and the FHA loan limits won’t
interfere with the process of obtaining the EEM. FHA EEMs are
available for site-built as well as for manufactured homes. The
Manufactured Housing
Research Alliance Web site has information about
FHA EEMs for ENERGY STAR qualified manufactured homes.
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Conventional Energy
Efficient Mortgages
Conventional EEMs can be offered by lenders
who sell their loans to Fannie Mae and Freddie Mac. Conventional
EEMs increase the purchasing power of buying an energy efficient
home by allowing the lender to increase the borrower’s income by a
dollar amount equal to the estimated energy savings. The Fannie Mae
loan also adjusts the value of the home to reflect the value of the
energy efficiency measures.
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Mortgage
Alternatives
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A
general advice when shopping for
mortgage is to look for
competitive rates and a lender
with a reputation for integrity
and good service.
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Comparing prices is always
important, but not easy. A
variety of fees a lender may
charge could begin with the
submission of the loan
application, to discount points
which are usually the larger fee
on a mortgage. Two points more
on a loan is a significant
increase since it changes the
effective interest rate
significantly.
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The
annual percentage rate (APR) is
a standard expression of credit
costs that give borrowers the
ability to compare lender’s
total finance charges. It is the
relationship of total financing
charge to the total amount
financed or in other words the
effective interest rate for a
mortgage loan repaid over its
full term.
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Energy Efficient Mortgage
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Always remember that the actual
effective interest rate paid
depends on the number of years a
loan is kept and is computed as
follows: Note rate + (points/8)
= Effective Interest Rate. If
for example buyer intents to
occupy a property for three
years should avoid paying points
since it will take almost six
years to be able to recapture
what he paid. It is preferable
sometimes the borrower to ask
the lender to raise the interest
rate in order to avoid paying
discount points and origination
fees.
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Fixed- Rate Mortgages
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A
fixed rate mortgage is called a
mortgage that precludes a change
in the interest rate throughout
the entire duration of the loan.
Some of the mortgages in this
category include the traditional
30-year, the 20-year, the
15-years and even the 10-year
mortgage. There are also
bi-weekly mortgages which
shorten the life of the loan by
monthly payment every two weeks.
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A
fixed rate mortgage is good for
you if:
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You decided on living at
your new home for a long
term period of time.
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You are someone that
likes stability on your
monthly household
budget; and does not
have to worry about
changing payment amounts
or interest rate.
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30- year Fixed Rate
Advantages:
- Used in a
great extend by first-time buyers since
is the most common and the easiest to be
approved.
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It has the
lowest monthly payments compared to the
15-year and the bi-weekly loans which
could be ideal on a tight household
budget.
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Provides
stability on future increases in
interest and inflation rates.
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Provides
the maximum interest deduction for
income tax purpose.
Disadvantages:
In the event of a drop in interest
rates the fixed rate mortgage will
not drop to reflect the lower market
rates. A homeowner will need to
refinance i.e. repay the original
loan and proceed on a new loan with
the lower interest rate. As a result
the borrower has to pay a
substantial amount of money on
closing costs.
15 Year Fixed Rate
Advantages:
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Similar
with the 30-year, the 15-year mortgage
has mortgage rates that throughout the
life of the loan do not change so as the
monthly principal and interest.
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Usually the
15-years mortgage has lower interest
rates than the 30-year. When lenders get
their money faster means less money is
borrowed for less time and less interest
is paid over the life of the loan
(approximately 50percent less).As a
result the interest rates are slightly
lower which results in forced savings
and faster equity buildup.
Disadvantages:
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Flexibility
may be lost since higher monthly
payments might not allow the borrower to
take advantage of future investment
opportunities.
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Tax
advantages related to home mortgages and
investment opportunities are lost.
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There is a
risk in the event of future increase in
income tax rates to increase the
mortgage’s net costs.
Biweekly
Mortgage:
Advantages:
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It combines
the benefits of the 30-year and 15-year
mortgage since it is amortized over a
30-year period and with payments made
every two weeks but without the higher
payments of the 15-year loan.
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Many times
you can change with an advance notice
the biweekly to a traditional 30-year
fixed rate.
Disadvantages:
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It
threatens borrowers with no stable
income or savings and checking accounts.
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Locks
borrowers into payment plans that could
setup themselves at their own
discretion.
Adjustable
- Rate Mortgages:
Developed during a
period of high interest rates, can help
prospective home owners to achieve their dream
home ownership. The adjustable rate mortgage
(ARM) becomes noticeably more popular when
interest rates rise and loose popularity when
interest rates fall. It allows lender to
increase or decrease interest rates depending on
changes of a specified index.
Choosing an ARM that has an index that
reacts quickly allows you to take full advantage
of falling interest rates. On the other hand an
ARM that lags behind the market lets you take
advantage of lower interest rates in an event of
an upward movement. In addition ARM usually
contain certain consumer safeguards such as
interest rate caps, which limit the amount that
an interest rate can fluctuate. This prevents
future rising in interest rates and helps the
homeowners to maintain an affordable mortgage
payment.
Something to
remember is that both Fannie Mae and Freddie Mac
on transactions with less than 20 percent down
on one-year, require being qualified at the
initial interest rate plus 2 percent.
Other
options that need to be asked when shopping for
an ARM are:
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If
a possible transfer of the mortgage to a new home buyers is
allowable and whether or not the same terms can be applied if
the new home buyer qualifies for the loan.
- If the ARM
could be converted to a fixed rate
mortgage at a predetermined period,
locking in a lower interest rate.
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Balloon Mortgages:
They are short term mortgages that provide a level payment feature
during the term of the loan. They have similar features as a fixed
rate mortgage but the loans do not fully amortize over the original
term. The maturity types could vary and first time mortgages usually
have a term of 5 to 7 years. At the end of the loan term the
remaining balance has to be paid in full and this could be
accomplished by refinancing.
FHA Mortgage:
FHA is a mortgage program in which Federal Housing Administration
loans are backed by the U.S. government; which means the lender is
reimbursed by the federal government in an event of default by the
borrower. FHA is great for first time buyers since its primary
benefit is to enable home buyers to purchase a loan with a minimal
down payment. Typically, only 5 percent is needed instead of the 20
percent down payment to secure a conventional financing. The amount
of the loan is usually based on the average cost of housing within a
specific geographic area; thus a borrower that leaves on a larger
metro area with higher housing prices can get a higher loan compared
with a buyer in rural area and lower housing cost. FHA requires a
purchase of a mortgage insurance premium ( MIP) which is usually an
up-front of 1.50 percent that could be finance into the loan amount
and is paid at closing. One of FHA benefits is that the down payment
can be 100% gift funds without the need of verification of the
source of the gift. Proof of deposit in the borrower's bank or
savings account prior to underwriting approval, is required. In the
event of full repayment of a loan backed by FHA you may have money
owed to you. In that case you could call a toll free number
800-697-6967 for claims.
VA Mortgage:
VA is another government program, which is designed primarily to
enable qualifying veterans to buy a home with no down payments and
minimum closing costs. Who is eligible are veterans who served on
active duty during World War II, Vietnam era, Korea and Persian Golf
conflict. They must have at least 90 days active service during war
time and 180 days active service during peace time to be eligible.Va
loans could be used to buy a new home or condo, built a new home,
purchase and improve a home, refinance or buy a manufactured home. A
VA loan has no monthly mortgage insurance premium and can be prepaid
with no penalty.
Mortgage Tip: and Solutions:
- In
a preconstruction transaction
consider a loan with longer
interest-rate guarantee. Since
projects now take longer to
build the six months cap can be
replaced by loans which offer 12
month rate protection.
- In
a situation that you need a year
or two breathing space, before
start making full payments, a
fixed-rate loan with an initial
buy-down can give you the
advantage of lower mortgage
payments for a short period of
time. The interest rate is
even lower than that of an ARM.
- If
the need of cash flow is as
important as building equity, a
short-term adjustable ARM of
seven to ten years can allow you
interest only payments when
extra cash needed. Short term
ARMS are very competitive with
fixed loans.
- You
are an investor that is buying a
four-plex and your guidelines do
not fit into Fannie Mae or
Freddie Mac requirements an
Alt-A mortgage could be the
solution. A secondary market is
established and now mortgagors
are more willing to lend loans
of $400,000 and up at a prime or
sub prime rates.
- If
you need a lower monthly payment
and like the security of a
traditional fixed rate mortgage,
a 40-years fixed-rate loan could
be the answer.
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Equal Housing Opportunity