How do energy efficient renovations impact home value? Many homeowners and lenders struggle to find the answers to this question.

According to new Freddie Mac research, investing in energy efficiency home improvements can lead to increased home values. The research findings can help lenders and other mortgage professionals determine how to better incorporate the value of energy efficiency into mortgage underwriting practices.

Since energy efficiency improvements can provide homeowners with cost savings, the demand for energy efficiency home features is increasing. As it does, the mortgage industry is responding with green lending solutions.

The Price of Energy Inefficiency

According to the U.S. Department of Energy (DOE), the typical U.S. family:

  • Spends $2,200 per year on energy bills—typically attributed to poor insulation, inefficient lighting fixtures, air leaks, and outdated heating and cooling systems.
  • Could reduce energy bills by up to 30 percent by making energy efficient upgrades.

Energy inefficiency places a more significant burden on low- and moderate-income families who are more likely to live in older and less efficient homes. Rural households experience a more pronounced burden—Bureau of Labor Statistics data shows these households’ overall expenditures on utilities are about 25 percent higher than their urban counterparts.

Energy Efficiency Reduces Costs and Improves Home Values

Freddie Mac conducted new research into the relationship between energy efficient homes, sales prices and mortgage performance. Homes that demonstrate greater energy efficiency can command higher sales prices due to potential savings on utility bills, according to the study.  

Other findings from the study, which was based on energy efficiency-rated homes*, include:

  • On average, rated homes are sold for 2.7 percent more than unrated homes.
  • Among rated homes, those with better ratings sold for three to five percent more than lesser-rated homes.
  • Homeowners with higher debt-to-income (DTI) ratios—45 percent and above—who have energy-rated homes kept up with monthly mortgage payments better than owners of unrated homes. The 60-day delinquency rate on conventional mortgages was about 2 percent lower for those with energy efficiency-rated homes than those with unrated homes.

 

*Energy efficiency ratings measure a home’s energy consumption and how efficiently the home uses the energy it consumes.

Efficient Financing, Efficient Home

Beyond the impact on home values, mortgage professionals can connect the benefits of energy efficiency to mortgage underwriting practices. Consider that less than 1 percent of U.S. mortgages. Homeowners and homebuyers typically finance these types of improvements through personal loans or other unsecured financing and credit cards which generally have less favorable terms than mortgage financing. This data suggests that the market may be underserved and presents an opportunity.

Freddie Mac offers a new green product with broad financing options that can help homeowners to:

  • Finance energy and water efficiency improvements in an existing home.
  • Pay off higher interest debt incurred from installing energy and/or water efficiency improvements.
  • Purchase a home and finance future improvements in their mortgage.
  • Combine energy efficiency home improvements with other low down payment products to purchase and settle on a house before improvements are complete.

 

With the greater flexibility and underwriting guidance available now, lenders can better assess the contributory value of the energy efficient features to the property, increase loan originations, expand their green product offerings, and help families build equity faster while improving their homes.