EEBA Newsletter

Posts From December, 2019

Financing Zero Energy

Some ideas on how to have the money discussion with homebuyers
Financing Zero Energy

by Bruce Sullivan

I've seen lots of articles that try to educate homeowners about zero energy construction by diving right into the building science and construction details and leaving the financial payoffs until the end. When I teach EEBA's Path to Zero course, however, I flip that sequence. I always begin with an in-depth discussion about money issues because I know that's the gorilla in the room. Once the attendees understand the financial benefits of this way of building, their minds open to learning more.

Of course, the EEBA audience is a professional one, but the approach also works with homeowners, making it a good idea for the builder to consider having this discussion early.

In my conversations with builders, however, I find that many aren't sure about how best to have the money talk. Fortunately, it's not that difficult. Most homeowners already have an intuitive grasp of the fact that energy-saving improvements, such as adding insulation and high-efficiency heating systems, will benefit them in the long run. Helping them put numbers to that understanding is a matter of framing the discussion correctly and presenting the right financing options.

It's About Income

How can we encourage more people to build zero energy homes and pay for them with sound financing? There is a simple market-based approach that encourages people of all income levels. It’s an approach that requires no subsidy, making it sustainable in the long term.

Every home has a monthly utility bill. By reducing the utility bill, occupants not only save money: they gain buying power. Every $10 in savings is really $10 more income, and that extra income can be put towards the monthly loan payment. Phrasing things this way helps people see that energy-saving features begin paying for themselves from the very first month.

Although most EEBA readers build new homes, a home improvement example can help get the point across.  

A good one is the purchase and installation of a 50-gallon heat pump water heater. The heat pump unit might cost as much as $1000 more than a standard electric model, but it will save $330 a year on the energy bill for a household of four. The monthly savings come to $28 per month, which will help the family qualify for a loan to install the equipment. For a 5-year, $1500 home improvement loan at 5% interest, the payment will also come to $28 per month, so the extra cash flow from that savings will cover the loan payment. After five years, the loan is paid off but the homeowners continue to reap that extra cash flow.

It works the same way when you add up all the energy-saving upgrades in a new zero energy home. A simple mortgage calculation will tell you that just $10 more income per month will allow a homebuyer to qualify for an additional $2000 in mortgage financing on a 30-year loan at 4% interest. (You can calculate this for yourself on any mortgage calculator. Just enter $2000 as the principal amount, 4% as the interest rate, and 30 years as the duration.) If energy modeling of your energy upgrades shows an extra $100 per month in cash flow, which  is easily achieved, that's an extra $20,000 in borrowing power.

Builders I've heard from who use this approach say that it resonates with buyers. One is T.W. Bailey Sr., president of Bailey Family Builders, Frisco, Texas. He used to communicate the return on an energy improvement by telling homeowners how long the energy upgrade would take to pay for itself. However, he finds that people are more responsive when he presents the savings as extra monthly income. "It's more effective to show them that the return on investment on what they spend for green building will be realized the first month they're in the home," he says. 

"Take the example of a 3,000 square-foot home with a $300/month average utility bill," he continues. "If you spend $10,000 additional on the green aspects of the home, you can reduce that energy cost to $150 per month. At today’s mortgage rates, the $10,000 you spend costs you about $30 per month. You’ve saved $150 in utility costs and you’ve spent $30 to do it. Your positive cash flow that first month is $120, and it will be at least $120 a month after that. Whenever I’ve explained that to a customer, whether they’re buying a $100,000 home or $3 million home, they’ve never failed to embrace it and find great value in it.”

Navigating The Lending Landscape

For people who qualify for the loan based on their existing capital resources, this is a good investment, and one that frequently beats stocks. For lower and middle income consumers however, there is often a missing link which, if fixed, would help more of them qualify for loans that cover the added costs needed for a zero energy home or an energy efficiency upgrade to their current home.

Lenders typically base loan approval in part on the cost of home ownership. They calculate a borrower’s expenses as principal, interest, taxes, and insurance – also called PITI. Energy costs are ignored even though energy bills are due every month and can be greater than some of the other factors that go into the lender’s calculation.

If lenders would simply add energy costs to their calculation (PITI+E), a world of new opportunities would be available. In effect, occupants would be allowed to shift money from monthly utility bills (an expense) to home improvement, or a zero energy home purchase, financing (an investment). The total monthly budget would stay the same. Borrowers get a better home for no additional cost, while the local economy gets a boost and emissions are reduced.

The chart compares the monthly payments for a zero energy home with the monthly payments for a similar code built home using typical numbers for PITI+E. While the payments in this example are equal, the owners end up with a much better home for the same cost per month. The energy savings from a zero energy home are actually added income that allows you to purchase a superior home. In other words, that is a smart investment!

Since current lending practices do not embrace this common-sense idea, legislation or new regulations may be required to compel mortgage lending regulators and the secondary mortgage market to include energy costs as a loan qualification criterion.

If your bank doesn't yet accept PITI+E as standard practice, there are lending programs that can be used by any lender, including Greenchoice from Freddie Mac and HomeStyle by Fannie Mae.

And as with any loan, documenting the value of home energy features and the modeled energy savings is still important. The ability to do so more easily seems to be coming. In fact, a recent article in this newsletter [Sandra Adomatis' appraisal article] noted that Fannie Mae and Freddie MAC are in the process of revising the Uniform Residential Appraisal Report (form 1004). That should make it easier for appraisers to value energy efficiency and green features.

These changes have the potential to generate millions of dollars of business for local contractors and suppliers. Lenders will make more low-risk loans. Working people will have more stable finances and more comfortable homes. And as a society we will be further reducing our carbon emissions. This is a win-win-win solution.

Of course, it may take a while for these programs to become mainstream. Meanwhile, you can help the homeowner present the above facts to the relevant decision makers. Whether it's a small energy savings project or a zero energy home, you can show these savings to the loan officer and/or appraiser as part of your documentation, and explain that these energy savings are really income that allows you to make the payments on the energy upgrades.

Even though they do not officially make energy savings part of their formula, by documenting these earnings, it's possible to build enough trust and confidence with the loan officer that they are more likely they will approve the loan.


Bruce Sullivan has been helping building professionals increase energy efficiency for more than 35 years. In writing, consulting, and training, he places a strong emphasis on real-world obstacles and practical solutions.  In 2006, his personal high-performance home was honored with the NAHB Research Center’s Energy Value Housing Award and the NAHB Green Building Award. In 2015, he and his wife built a home that generates enough electricity to operate the home and an electric vehicle. He is currently technical director at the Zero Energy Project, where he published an earlier version of this article.