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Stylized Text: Home Energy Ratings.

Financing Energy Efficiency: An EEM Handbook

 

Appendix A 
Effect On Mortgage Amount Of 
Energy Efficient Improvements

NOTE: All examples assume the property appraised (not including the energy efficient improvements) for an amount equal to or exceeding the sales price of the property. All loan amounts are prior to adding HUD's Up front Mortgage Insurance Premium (UFMIP). Calculate maximum mortgage amounts (before adding the cost of energy efficient improvements) as presently required by applying maximum loan-to-value (LTV) ratios to the mortgage basis, as well as by applying the 97.75% (or 98.75 for properties at or below $50,000) limitation to the appraised value excluding closing costs. The lower of the two amounts determines HUD's maximum insurable mortgage (up to the maximum dollar amount for the area) before adding the cost of the energy efficient improvements and UFMIP. Except as noted, no maintenance costs for the energy efficient improvements are expected.

Example 1.

The existing property sold for $60,000. The borrowers wish to install $2,000 worth of energy-efficient (EE) improvements that have a useful life of 7 years and will save $35 in monthly utility costs. The borrowers, closing costs total $1,200, including $200 of the $250 charge for the HERS inspection report. The interest rate on the mortgage is 8.00%
 
$60,000   Sales Price $60,000    Ap. Value
+ 1,200   Closing Costs x97.75%   Max. LTV
$61,200   Mortgage Basis $58,650    Max Loan
x97/95%   Maximum Loan-to-Value Ratio
$58,640   Loan Amount (before UFMIP)
$2,000   Installed Cost of EE Improvements
7 Years   Expected Life of Improvements
$35   Expected Monthly Savings 
$420   Expected Yearly Savings 
5.206   Present Value Factor (8% Interest Rate @ 7 Years) 
$2,186   EE Premium (5.206PV x $420 Annual Savings) 

Since the present value of the energy savings over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, the entire cost of the improvements may be added to the mortgage amount (as shown below):

$58,640   Mortgage Amount from above
+ 2,000   Installed Cost of EE Items
$60,640   Mortgage Amount with Installed EE Items

Example 2.

The existing property sold for $60,000. The borrowers wish to install $3,000 worth of energy-efficient (EE) improvements that have a useful life of 10 years and will save $40 in monthly utility costs. The borrowers, closing costs total $1,200, including $200 of the $250 charge for the HERS inspection report. The interest rate on the mortgage is 8.00%
 
$60,000   Sales Price $60,000    Ap. Value
+ 1,200   Closing Costs x97.75%   Max. LTV
$61,200   Mortgage Basis $58,650    Max. Loan
x97/95%   Maximum Loan-to-Value Ratio
$58,640   Loan Amount (before UFMIP)
$3,000   Installed cost of EE Improvements
10 Years   Expected Life of Improvements
$40   Expected Monthly Savings 
$480   Expected Yearly Savings 
6.710    Present Value Factor (8% Interest Rate @ 10 Years) 
$3,220   EE Premium (6.710pv x $480 Annual Savings) 

Since the present value of the energy savings over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, the entire cost of the improvements may be added to the mortgage amount (as shown below):

$58,640   Mortgage Amount from above
+ 3,000   Installed cost of EE Items
$61,640   Mortgage Amount with Installed EE Items

Example 3.

The existing property sold for $60,000. The borrowers wish to install $2,500 worth of energy-efficient (EE) improvements that have a useful life of 7 years and will save $35 in monthly utility costs. The borrowers, closing costs total $1,200, including $200 of the $250 charge for the HERS inspection report. The interest rate on the mortgage is 8.00%.
 
$60,000   Sales Price  $60,000   Ap. Value
+ 1,200   Closing Costs x97.75%   Max. LTV
$61,200   Mortgage Basis  $58,650   Max. Loan
x97/95%   Maximum Loan-to-Value
$58,640   Loan Amount (before UFMIP) 
$2,500   Installed Cost of EE Improvements 
7 Years   Expected Life of Improvements 
$35   Expected Monthly Savings 
$420   Expected Yearly Savings 
5.206   Present Value Factor (8% Interest Rate @ 7 Years) 
$2,186   EE Premium (5.206PV x $420 Annual Savings) 

Since the present value of the energy savings over the expected life of the improvements (the EE premium) DO NOT exceed the installed cost of the improvements, the cost of the improvements are not eligible to be added to the mortgage amount.


Example 4.

The existing property sold for $60,000. The borrowers wish to install $5,000 worth of energy-efficient (EE) improvements that have a useful life of 30 years and will save $40 in monthly utility costs. The borrowers, closing costs total $2,500, including $200 of the $250 charge for the HERS inspection report. The interest rate on the mortgage is 7.50%
 
$60,000   Sales Price $60,000    Ap. Value 
+ 2,500   Closing Costs x97.75%   Max LTV
$62,500   Mortgage Basis *$58,650    Max Loan
x97/95%   Maximum Loan-to-Value Ratio
$59,875   Loan Amount (before UFMIP)

* Because of the 97.75% limitation applied to the appraised value excluding closing costs, the maximum insurable loan before UFMIP is $58,650.

$5,000   Installed Cost of EE Improvements
30 Years   Expected Life of Improvements
$40   Expected Monthly Savings 
$480   Expected Yearly Savings 
11.81   Present Value Factor (7.5% Interest @ 30 Years) 
$5,668   EE Premium (11.810PV x $480 Annual Savings)

Since the present value of the energy savings over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, $4,000 of the improvements may be added to the mortgage amount (as shown below). Only $4,000 of the improvements may be added to the mortgage because of the limit on the amount of EE premium that can be added to the mortgage. See paragraph IB of the Mortgagee Letter:

$58,650   Mortgage Amount from above
+ 4,000   Installed Cost of EE Items
$62,650   Mortgage Amount with Installed EE Items

Example 5.

The existing property sold for $60,000. The borrowers wish to install $3,000 worth of energy-efficient (EE) improvements that have a useful life of 10 years, has average maintenance costs of $25 per year, and will save $45 in monthly utility costs. The borrowers, closing costs total $1,200, including $200 of the $250 charge for the HERS inspection report. The interest rate on the mortgage is 8.00%.
 
$60,000   Sales Price $60,000    Ap. Value
+ 1,200   Costs x97.75%   Max. LTV
$61,200   Mortgage Basis $58,650    Max. Loan
x97/95%   Maximum Loan-to-Value Ratio
$58,640   Loan Amount (before UFMIP)
$3,000   Installed Cost of EE Improvements
10 Years   Expected Life of Improvements
$45   Expected Monthly Savings 
$515   Expected Yearly Savings ($540-$25 maintenance costs) 
6.710   Present Value Factor (8% Interest Rate @ 10 Years) 
$3,456   EE Premium (6.710PV x $515 Annual Savings) 

Since the present value of the energy savings (not of maintenance costs) over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, the entire cost of the improvements may be added to the mortgage amount (as shown below):

$58,640   Mortgage Amount from above
+ 3,000   Installed Cost of EE Items
$61,640   Mortgage Amount with Installed EE Items

Example 6.

The maximum mortgage limit for the area is $151,725. The existing property sold for $155,000. The borrowers wish to install $10,000 worth of energy-efficient (EE) improvements that have a useful life of 30 years and will save $75 in monthly utility costs. The borrowers, closing costs total $5,000, including $200 of the $500 charge for the HERS inspection report. The property was valued at $155,000. The interest rate on the mortgage is 8.00%.
 
$155,000   Sales Price $155,000    Ap. Value
+ 5,000   Closing Costs x97.75%   Max LTV
$160,000   Mortgage Basis $151,512     
x97/95/90   Maximum Loan-to-Value Ratio
$150,750   Loan Amount (before UFMIP)
$10,000   Installed Cost of EE Improvements
30 Years   Expected Life of Improvements
$75   Expected Monthly Savings 
$900   Expected Yearly Savings 
11.258   Present Value Factor (8% Interest Rate @ 30 Years) 
$10,132   EE Premium (11.258PV x $900 Annual Savings) 

Although the present value of the energy savings over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, the amount that may be added to the mortgage amount is limited to the lowest of the cost of improvements, $8,000 or 5% of the appraised value (as shown below):

$150,750   Mortgage Amount from above
+ 7,750   Lowest of installed cost ($10,000), $8,000 limit, or 5% of appraised value of $155 ($7,750) 
$158000   Mortgage Amount with Installed EE items

Also note that the mortgage amount permitted exceeds the statutory limit for the area of $151,725 because of the amount of the EE items.


Example 7.

The existing conventional loan is being refinanced to a HUD-insured mortgage. The borrower owes $60,000 and wishes to install $2,500 worth of energy-efficient (EE) improvements that have a useful life of 10 years and will save $35 in monthly utility costs. The property was appraised for $65,000 and the borrower's closing costs including discount points total $2,500, including $200 of the $250 charge for the HERS inspection report. The interest rate on the mortgage is 8.00%
 
$60,000   Unpaid Principal Balance $65,000    Ap. Value
+ 2,500   Closing Costs + 2,500   C. Costs
$62,500   Maximum Mortgage $67,500    Mort Basis
x97/95%   Max LTV
$64,625   Loan Amount
$2,500   Installed Cost of EE Improvements
10 Years   Expected Life of Improvements
$35   Expected Monthly Savings 
$420   Expected Yearly Savings 
6.710   Present Value Factor (8% Interest Rate @ 10 Years) 
$2,818   EE Premium (6.710PV x $420 Annual Savings) 

Since the present value of the energy savings over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, the entire cost of the improvements may be added to the mortgage amount (as shown below):

$62,500   Mortgage Amount from above
+ 2,500   Installed Cost of EE items
$65,000   Mortgage Amount with Installed EE Items

Example 8.

The existing property is being streamline refinanced without an appraisal from a 12% interest rate mortgage to a 8% interest rate. The borrower owes $60,000 (of an original debt of $61,500) and wishes to install $2,500 worth of energy-efficient (EE) improvements that have a useful life of 10 years and will save $35 in monthly utility costs.
 
$60,000   Unpaid Principal Balance (Loan excluding MIP cannot exceed this amount; no closing costs may be financed.) 
$2,500   Installed Cost of EE Improvements
10 Years   Expected Life of Improvements
$35   Expected Monthly Savings 
$420   Expected Yearly Savings 
6.710   Present Value Factor (8% Interest Rate @ 10 Years) 
$2,818   EE Premium (6.710PV x $420 Annual Savings)

Since the present value of the energy savings over the expected life of the improvements (the EE premium) is greater than the installed cost of the improvements, the entire cost of the improvements may be added to the mortgage amount (as shown below) provided that the principal and interest of the new mortgage with the energy efficient items added is less than the P&I of the mortgage being refinanced:

$60,000   Mortgage Amount from above
+ 2,500   Installed Cost of EE Items
$62,500   Mortgage Amount with Installed EE Items
SP    
Compare:   P&I for $61,500 @ 12% = $633
    P&I for $62,500 @ 8% = $458 

Since even with the inclusion of the energy efficient items into the new mortgage amount there is a reduction to the borrowers monthly principal and interest payment, the installed cost may be added to the insurable mortgage.

 

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