How an Energy Efficient Mortgage Works


Older homeowners who’ve been in a home for a whole might be forgiven for not knowing what an Energy Efficient Mortgage, or EEM, is. However, the concept is becoming a widespread approach that incorporates a new home’s energy efficiency within the calculations of the home purchase financing. In a nutshell, the level of energy efficiency a home has creates a way for homeowners to use a mortgage to pay for new upgrades that improve energy efficiency.

How It Works

A normal mortgage takes the value of a complete home and the land it sits on from an appraisal. This value is then considered the market figure that the home would earn if it was sold to someone else. The figure is important because homes are often used for collateral for their own mortgages of home purchase loans. If the borrower defaults, then the home can be resold to recoup the lost loan. So lenders have a vested interested in knowing for sure what a home is worth before financing it. The same figure is often used to determine whether a borrower is eligible to be financed. The base valuation gets used in formulas that determine how much loan liability the mortgage will be versus a borrower’s income. If the result percentages are too low, then the applicant is denied the loan.

An energy efficient mortgage takes a new home that already has an energy efficient rating based on ENERGY STAR certification and gives that status a monetary credit. That credit in turn is applied on top of what it would normally cost to finance the home in a traditional mortgage. The financial difference, dubbed energy savings value, can then be used by a borrower as additional loan funds to pay for yet more energy efficient changes and upgrades to the home. Lenders now have the ability to incorporate energy-efficient mortgages in traditional loans, Veteran’s Administration loans and Federal Housing Authority loans. You can learn more about the specifics of EEMs at


So why would a borrower want to take on yet more borrowing beyond what a home is worth? Most homeowners find that after a mortgage is approved and the home is bought, it is very hard to make major upgrades to a home outside of some other kind of financing, such as a home equity loan or a refinance. The amount of money needed for the project is often more than what people have in ready available cash. With the energy-efficient mortgage, however, such projects can be built into the home purchase at the beginning, at the same interest rate cost and payment window as the regular home purchase. That saves money as well as makes it possible to make desired upgrades.

If you’re ready to begin shopping for an energy efficient mortgage, you can get started by comparing rates using RateZip’s mortgage comparison tool.

Paul Everett is a financial writer located in NYC. He has over 20 years of experience writing about a wide variety of personal finance issues.