How does the Energy Star certification work?

Q: A local homebuilder is offering Energy Star-certified properties. They say this is a big money saver. How does this program work?

A: Energy Star is an EPA program that highlights energysaving options. According to the government, the nation’s 20 largest homebuilders all construct Energy Star-certified homes and “over 2.2 million Energy Star certified new homes and apartments have been built to date, with more than 120,000 in 2020 alone. Energy Starcertified homes and apartments are at least 10% more energy efficient than those built to code and achieve a 20% improvement on average.”

In other words, an Energy Star home will likely have such advantages as better insulation; appliances that require less power to operate; better thermostats; more efficient hot water heaters, clothes washers and clothes dryers; energy-efficient lightbulbs; and more efficient heating and air conditioning systems. Combine these factors and the result is smaller energy bills.

Basic energy efficiencies will produce savings for the life of the property. Better insulation, as an example, saves money year after year.

What’s curious about the Energy Star program is that it makes a lot of sense, and yet such new homes are not universally available. For instance, in 2020 there were roughly 1.26 million privately-owned housing units under construction and even though tax credits are available to builders, only 10% or so were Energy Star qualified.

This is a concern because lots of new Energy Star-qualified homes can mean big energy savings nationwide — and that means less pollution, less fracking, fewer generating plants, and greater energy independence. The government says that in 2019, the Energy Star program helped save “nearly 500 billion kilowatthours of electricity and avoid $39 billion in energy costs.”

Homes that consume less energy have lower monthly utility costs. That’s one financial benefit from Energy Star development.

However, there’s also a second, the energyefficient mortgage (EEM).

The theory behind energy-efficient mortgage loans is that the homeowners spend less money per month on utilities and thus have more dollars for a mortgage. Fannie Mae, Freddie Mac, the VA and the FHA all offer energyefficient mortgage financing. Such loans can be used to buy an energy-efficient home or to refinance and pay for energyefficient upgrades.

For example, under the FHA program, refinance money can be used to improve household weatherization. A basic test is whether an improvement can pay for itself through lower energy costs.

When buying under the FHA program, an energyefficient mortgage offers higher debtto-income (DTI) ratios — 33/45 — when compared with the 31/43 standard. This means a borrower can qualify for financing with higher monthly debt costs than might otherwise be allowed. Seen another way, a qualified borrower can often get a bigger loan with energyefficient mortgage financing.