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By now, you know that energy efficiency saves you money. Even home improvements that require an initial investment will end up costing you less over time than keeping things the way they are. These improvements also make your house more valuable, which
appeals to buyers and lenders—and the reductions you make in energy consumption help utility companies defer the costs of building new facilities.
In fact, both government agencies and private businesses, such as mortgage lenders and power utilities, offer incentives to help you make the transition from traditional technologies to ones that are more energy efficient. This chapter will provide a brief overview of two programs: tax credits and energy efficient mortgages (EEMs).
Federal Tax Credits
First, an important distinction: tax deductions allow you to reduce the amount of your declared taxable income, while tax credits let you take an amount off your total tax bill. In most situations, tax credits save you more—even if the dollar amount is the same.
The federal government offers tax credits for activities that benefit the economy. Now that energy conservation is seen as an important national priority, you are allowed to claim tax credits for several kinds of home improvements, such as adding insulation, replacing windows, and installing more efficient heating and cooling equipment.
Here is the current “credit for nonbusiness energy property” list of product types:
• Exterior windows and skylights
• Storm windows
• Exterior doors
• Storm doors
• Metal roofs
• Insulation
• Central air conditioning
• Air source heat pumps
• Geo-thermal heat pumps
• Gas, oil, or propane furnaces or hot water boilers
• Advanced main air circulating fans
• Gas, oil, or propane water heaters
• Electric heat pump water heaters
• Solar water heating
• Photovoltaic systems
The list also includes credits for hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles, and for some other applications of fuel-cell technologies.
Limitations and Conditions
These credits are all subject to conditions, from minimum values of result to limits on the amount you can claim. And you may have noticed that most of these credits apply to renovations and repairs rather than to new construction. But if you’re planning to make any
home improvements, especially ones that bring environmental benefits, take a look at the incentives available to you. One of them may make a project more feasible, or allow you to do more than your existing budget will allow.
New houses won’t qualify for some of these credits, such as those for “eligible building envelope components” or “qualified energy properties.” That means windows, doors, insulation, roofs, and HVAC and non-solar water heaters. But you may still be able to get
tax credits for photovoltaics, solar water heating, and fuel cells for new home construction.
Energy Star and Tax Credits
The Energy Star program from the U.S. Environmental Protection Agency (EPA) provides guidelines for construction materials and appliances, as you may remember from elsewhere in this book. The program also includes a comprehensive set of requirements for an entire new house to earn an Energy Star rating.
To qualify, a new house must be at least 15 percent more energy efficient than one built to the 2004 International Residential Code (IRC). It must also include additional energy-saving features to become 20 to 30 percent more efficient than standard houses.
Almost any kind of house can meet these requirements, as long as it’s no more than three stories high. It can be a single family, attached, or low-rise multifamily house; a manufactured house; a systems-built house, such as one with structural insulated panel (SIP), insulated concrete forms (ICF), or modular construction; a log house; a concrete
house; or even an existing retrofitted house.
For the purposes of Energy Star ratings, the systems that make a house energy efficient include effective insulation, high-performance windows, tight construction and ducts, and efficient heating and cooling equipment. By using Energy Star qualified lighting fixtures,
compact fluorescent bulbs, ventilation fans, and appliances, a new house can provide even greater comfort, savings, and environmental benefits.
Not all Energy Star qualified houses or products qualify for tax credits. Standards for products that merit tax credits are even stricter than those for earning Energy Star qualification. Both kinds, of course, will save you money over the long term.
Getting Over the Threshold
While it will eventually cost less to own, a house that features energyefficient improvements is generally more expensive to buy. Even though environment-friendly materials and technologies only add about five percent to building costs, they have far greater value in the
eyes of buyers and lenders. The reason is simple: any improvement that saves energy and expense now will save even more in the future.
Government agencies such as the U.S. Federal Housing Administration (FHA), U.S. Department of Housing and Urban Development (HUD), and U.S. Department of Energy (DOE) offer information on ways for homeowners and builders to make energy efficiency a priority. One tool they recommend is an Energy Efficient Mortgage (EEM).
Energy Efficient Mortgages
An EEM has strict requirements and specific advantages. Whether it’s a conventional mortgage, FHA, or VA, any EEM is designed to make energy-efficient houses more affordable to buyers. This means the house has to meet several criteria for energy efficiency, and the buyer has to fulfill all the other requirements to take out the loan.
Conventional EEMs
Conventional EEMs can be offered by lenders who sell their loans to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, better known as Fannie Mae and Freddie Mac. These conventional mortgages are adjusted by the same amount in two directions. Once the estimated energy savings are calculated, that amount is added to the borrower’s stated income for the purposes of the loan. A conventional EEM offered through Fannie Mae also adds the value of energy-efficient improvements to the value of the house itself.
FHA EEMs
An EEM from the FHA allows a lender to add the total cost of energyefficient improvements to an existing, approved mortgage. The amount is limited by both a dollar figure and a percentage of the house’s value. These EEMs are not affected by regular FHA loan limits,
and do not require any additional down payment. They are available for both site-built (permanent) and manufactured (mobile) houses, especially those qualified for Energy Star ratings.
VA EEMs
An EEM from the U.S. Department of Veterans Affairs (VA) is offered to qualified military personnel, reservists, and veterans. It helps pay for energy improvements that will be made to an existing house, although it limits the amount that can be borrowed.
Conclusion
An EEM benefits everyone involved in buying or selling a house. Buyers get favorable rates on desirable houses; sellers make their houses accessible to more buyers and close more quickly; builders and remodelers increase the initial and resale value of a house; and
lenders make sound investments in mortgages and the houses that serve as their collateral.
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