Lean Green Mortgages

Going green isn’t just a trend anymore; what started as a not-so-cost-effective environmental movement is now proving to have a twofold benefit, both to our wallets and Mother Nature.  

Most people want to save on their electricity bill.  Double-pane windows, low-wattage lights, better insulation, programmable thermostats, and smart appliances all contribute to reducing a home’s carbon footprint. 

But could an energy efficient home lower your mortgage payments?

The Institute for Market Transformation (IMT) partnered with the University of North Carolina in a study released on March 19th 2013.  The study found that Energy Star homeowners are 32 percent less likely to default on their mortgages.

The results of this study may prompt lenders to reduce the monthly mortgage payment when considering how energy efficient a home is. 

Lenders compare monthly expenses to monthly income when assessing lending risks.  For years, lenders assumed that smaller utility bills from energy efficient homes would reduce lending risk, but there was never any hard data to back up the claims.  Lack of study metrics, and small survey pools yielded inconclusive data. 

For the recent study, the IMT researchers looked at a real estate database from CoreLogic in order gather a sufficient sampling.  In an effort to make the study more controlled, researchers factored in metrics such as the borrower’s credit score, the size and age of the home, local unemployment rates, and local climate and energy prices.

The study examined 71,000 single-family, owner-occupied homes across 38 states and D.C. between 2002 and 2012.  Real estate statistics from California was unavailable due to privacy laws and the real estate data from Alaska and Hawaii deviates substantially from the rest of the continental US, so these three states were left out of the sample.    

Approximately 35 percent of the homes sampled were Energy Star-certified. 

The study measured loan default based on the percentage of homeowners who fell behind on their mortgage by 90 days or more.  Foreclosure laws differ from state to state making measuring default based on this indicator relatively tricky. 

The “urban legend” that lenders had assumed to be true, did indeed turn out to be true: homeowners of energy efficient homes were 32 percent less likely to default on their mortgage.   It is likely that having a couple of hundred extra dollars a month in a homeowner's pocket from energy savings could make well-insulated, tightly sealed homes a safer bet for banks.

However, there could be other factors contributing to these results. Since these homes tend to be more expensive, it is possible that a person who pays a premium for an energy efficient home may also be someone who is already more financially stable or astute than a conventional home buyer, even despite the fact that the study factored in a homeowner’s credit score,

Ultimately, this report could benefit homeowners looking to lower their mortgage. Lenders could better assess risks and offer attractive rates to encourage people to buy efficient homes. 

If you have any questions about this topic, don't hesitate to contact us. You can call us at 410.491.0200 or email at septstein@baybankmd.com.