Energy Efficient Mortgage
HUD Mortgagee Letter 93-13: Attachment 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 Upfront 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.
