Energy efficient mortgages can do three things:

1. EEM's allow you to borrow additional funds at the time of sale (or refinance) to make cost effective energy improvements to your home and finance those improvements as part of the first mortgage of the home. The savings in utility payments more than offset the increased mortgage payment; and a positive cash flow is established from the first month a person steps into their new home. It has been calculated that the average house in Louisiana that is upgraded at time of sale using an EEM will result in a net savings to the homeowner of between $300 and $400 every year. In some cases, the net annual savings can equal the monthly mortgage payment. In those cases, the homeowner is effectively only paying 11 payments each year. The 12th payment can be paid from the annual net savings.

2. EEM's can be used to qualify a person for home ownership using more lenient underwriting guidelines, possibly qualifying someone for a home they would otherwise not qualify for or allowing individuals to qualify for larger homes. This is allowed because an energy efficient home will have lower energy bills, leaving the homeowner with more income available for mortgage payments.

3. EEM's can be used to increase the total appraised value of your home to reflect it's improved level of energy efficiency. This is particularly important on new highly energy-efficient homes and refinances. It allows builders of super energy-efficient homes to get increased appraisals for their homes that more closely reflect their increased value. On a refinance, the loan to value (LTV) of the mortgage loan is calculated solely on the appraised value of the home. This affects both the amount of money the homeowner qualifies to borrow and whether or not they will have to pay private mortgage insurance (PMI) on the loan. Increased appraisals lower LTVs and thereby qualify the homeowner to borrow additional funds and reduce the potential for having to pay PMI.

Here is an example of how an energy efficient mortgage can work for the home buyer:

A 1,500 square foot house is between 12 to 20 years old. At the asking price of $75,000, the monthly payment (not including taxes and insurance) on a 30-year fixed rate mortgage at 7.5% interest is $524.42. Monthly utility bills on the home average $170, for a total monthly housing expense (mortgage payment plus utilities) of $694.42.

The home has its original central heating and air conditioning system. When the system was installed, it had a rated equipment efficiency somewhere in the range of 6 to 8 SEER. (SEER stands for Seasonal Energy Efficiency Ratio.) If it is anything like the typical installed system, it has leaky ducts. Duct leaks on a typical installation of that age can reduce the installed efficiency of the system by 50% or more. Consequently, the heating and air conditioning system is operating in the 3 to 4 SEER range. And this is only if it has been properly maintained and has the proper refrigerant charge.

Although the system may be operating fine at the moment, it is near the end of its useful life and will undoubtedly fail within a few years, probably at the most inopportune time, when the outside temperature equals your bank account -- 100 degrees and $100.

Additionally, the leaky duct work is not only wasting energy, but also introducing pollutants such as dust and attic insulation fibers into the breathing air of the home.

By using an energy efficient mortgage, you borrow an additional $4,000 at time of purchase to replace the central heating and air conditioning system, tighten up the duct work, add a couple inches of insulation to the attic and do some general weather stripping. This additional money increases your monthly mortgage payment by $27.96.

The minimum efficiency of air conditioners manufactured today is 10 SEER. So by tightening up the duct work and purchasing the bare minimum efficiency unit, you can, in essence, more than double the efficiency of the system. When you double the efficiency of the system, you cut your operating costs in half. Combined with the effects of additional insulation and weather stripping, you can expect to save 30 to 50% of the utility bill. To be conservative, let's say you save 35% or $60 per month.

Now your monthly housing expense (mortgage payment and utility bill) is $662.38. This is $32.04 less than you were paying before the work was done. This is an annual net savings of $384.48. And remember, the house is now worth more, is more comfortable, has better indoor air quality and you are no longer facing the prospect of having to replace the heating and air conditioning system.

Before the advent of heat pumps, many all-electric homes were heated with strip-resistance electric heating. Strip-resistance electric heating is still being used today, but in ever decreasing numbers. Strip-resistance electric heating is the most expensive type of heating available. Homes with this type of heating system that are upgraded with an EEM at time of purchase will generally realize larger than average savings.

In addition to saving money, the average house upgraded using an EEM prevents the release of nearly 7,300 pounds of carbon dioxide, the major cause of global climate change, and conserves the equivalent of 51,446 cubic feet of natural gas annually.

The Energy Rated Homes of Louisiana (ERHL) program has been developed specifically to improve the energy efficiency level of the housing stock in the state. ERHL pursues an incentive-based, private-sector, market-driven approach. It seeks to encourage energy efficiency through market-driven mechanisms such as energy efficient mortgages. The program is administered by the Department of Natural Resources' (DNR) Energy Section.