A green mortgage could be a good idea for homebuyers in the US

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.

Financing certain green improvements

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.

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.

Energy-efficient loans

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.

A new air conditioning unit

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 make it a lot more advantageous،” Kane said.