Homeowners who buy energy efficient homes or upgrade existing homes for greater energy efficiency also get more sustainable homeownership built right in, according to a new study.
The odds of a mortgage default on an Energy Star-rated home are one-third lower than a default on a mortgage for a home without the rating, according to “Home Energy Efficiency and Mortgage Risks,” by the University of North Carolina (UNC) at Chapel Hill Center for Community Capital and the Institute for Market Transformation (IMT), a nonprofit organization dedicated to promoting energy efficiency.
Why? Energy efficient homeowners have more money to not burn.
The joint UNC-IMT study examined 71,000 mortgaged homes from 38 states and Washington, D.C. Thirty-five percent of the homes were Energy Star rated and the others were not.
Energy Star home savings
Energy Star-rated homes are designed and built to deliver an energy efficiency savings of up to 30 percent compared to new homes without the certification.
That’s about $660 a year off the average annual $2,200 energy bill for a typical single-family home, according Energy Star.
Do the math. That’s more than a mortgage payment for some homeowners who buy a median priced or cheaper home.
The median existing, single-family home price was about $177,000 in February according to the National Association of Realtors. After a 20 percent down payment, financing $124,000 with a 3.5 percent, 30-year, fixed rate mortgage generates a mortgage payment of about $555 a month.
“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” said Cliff Majersik, executive director of IMT.
“We long believed this to be the case, and now this study proves it. Successful housing market reforms will require reconsidering the risk factors in mortgage default, including energy costs,” Majersik added.
The first academic study of its kind used homes from CoreLogic’s mortgage database, but only single-family, owner-occupied houses whose loans originated during 2002-2012 and were used for purchase only.
The study also found a mortgage holder with an Energy Star home was one-quarter less likely to prepay. Since lenders consider prepayment a risk, these loans are potentially more valuable to lenders, the study says.
Energy-efficient related underwriting needed
Those who conducted the study hope the results will prompt mortgage underwriters to give greater consideration to both the direct and indirect benefits of home energy conservation, something the Energy Efficient Mortgage (EEM) program is supposed to do.
Study authors say lenders may want to require an energy audit or rating as part of the mortgage underwriting process for all mortgages and that federal housing agencies could promote more underwriting flexibility for mortgages on energy-efficient homes.
Don’t hold your breath, given how long it has taken the market to recognize the enhanced energy efficiency-related property value boost that comes with installing solar panels.
Solar energy has been around for decades, but only recently have appraisers officially factored solar-power energy efficiency into valuation models.
The mortgage industry is even slower to move and relatively unchangeable without federal regulation to light a fire under it.
Energy efficient returned home value
Movoto.com also recently revealed the long-term connection between energy savings and enhanced home value can mean a 200 percent return on the money spent on solar.
Not only do homeowners with solar powered homes have smaller utility bills and extra money to pay the mortgage, studies show the $20,000 or more in added home value could help them out of a financial scrape, say, in the form of cash-out refinance, home equity loan or outright sale that is profitable.
More home value can also help in a loan modification or other workout to prevent foreclosure.
“Consumer and industry acceptance of energy efficiency is high. But the lack of broad consideration of potential energy savings in the mortgage underwriting process still prevents many moderate- and middle-income homebuyers from fully enjoying the cost savings,” said Roberto G. Quercia, UNC’s Chapel Hill Center director.
“Since our study findings now show that >energy efficiency is strongly and consistently associated with lower mortgage lending risk, lenders and policymakers have one more reason to promote it,” Quercia added.
Posted on May 3, 2013 at 6:04 pm by Willie & Ana Herber