What is a green loan?

Save money on energy bills with an environmentally sustainable home.

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Elissa SuhSenior Editor & Disability Insurance ExpertElissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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If you’re looking to reduce your environmental footprint — maybe you want to install solar panels or replace the old water heater that eats up too much energy — you may want to get a green loan. Implementing energy efficient measures in your home can help save the environment, but home improvements can be a costly undertaking. That’s why some lenders and states offer green loans.

In the long run, a green loan will help you save more of your income with lower energy bills. You’ll also be preparing for the future by increasing the value of your home and helping to fight climate change.

In this article:

How to get a green loan

You can get green financing through a government-insured FHA loan or a conventional loan program, and sometimes through your local credit union. A number of states also offer their own green lending programs with varying eligibility requirements.

Green loans have some benefits over normal loans. You don’t need home equity or cash upfront, and some financing programs like Colorado’s RENU loan have no nominal fees or prepayment penalty.

Green loans are also open to borrowers with a wider range of credit and tend to have lower interest rates than many other forms of financing, like personal loans or a home equity line of credit. Sometimes there’s no interest at all — such is the case in Nevada if you’re a state employee or military veteran and in New York if you meet certain income requirements. Otherwise, green loan interest rates typically fall below 5%.

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The term period and borrowing amount for green lending varies depending on what’s necessary to make your house more environmentally sustainable. The cost of improvements will be detailed in an energy audit, the first step to getting a green loan. An accredited contractor will assess your home’s efficiency, and may give it an energy rating from 0 to 150, where 0 equals maximum efficiency. They will look at how your house could be wasting resources (heat loss through poor insulation, for example), how more efficient technologies can be installed (like LED lights), and the cost of these improvements.

(Read more about home improvement loans.)

The contractor also considers how many people live in your household, how often they’re at home, and which rooms are used the longest. The lender typically appoints the contractor and pays for the assessment, but if they don’t you can find a professional energy auditor at the Residential Energy Services network.

What does a green loan cover?

When people think about energy efficient homes, the first thing that comes to mind are solar panels. But there are several other ways to have a more environmentally friendly home.

Green loans are often used for any of the following:

  • Solar panels and cool roofing

  • Water-saving irrigation system

  • Heating and cooling systems, like central air-conditioning or smart thermostats

  • Window upgrades

  • Insulation improvement

  • Energy Star appliances, such as dishwashers, refrigerators, washing machines

  • LED lighting

  • Pool pumps

  • Landscaping

Green mortgages

A green mortgage specifically provides financing for the purchase of an energy efficient house. Also called energy efficient mortgages (EEM) or energy improvement mortgages (EIM), these loans can be used to buy new houses that are already certified green, or renovate older homes so that they will be.

An EEM allows you to qualify for a higher mortgage with the expectation that you’ll be saving on energy bills, giving you more disposable income in the future. The lender will add the cost of upgrades to your mortgage, or if you’re purchasing an already green home, the lender will expand your qualifying debt-to-income ratio, which can ultimately help you get a bigger mortgage.

You can read more about energy savings for your home from the U.S. Department of Energy, and how to protect it with homeowners insurance here at Policygenius.

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